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Budget '96: the right direction: discussion on whether smaller government and lower interest rates will outweigh the impact of tough cuts.

MAXINE McKEW: It took four months to create this year's Budget, but John Howard was quickly calling it a success.

JOHN HOWARD: Last night's, first Costello budget rates a 7 or 8 out of 10.

MAXINE McKEW: But Peter Costello wasn't just patting his own back, he was demanding business pick up the challenge.

PETER COSTELLO: My message to Australian business is now is the time to invest.

MAXINE McKEW: Taking a page out of the dry economist's textbook, the Government has gambled that smaller government and possibly lower interest rates will outweigh the impact of tough spending cuts. Are they heading in the right direction? - that's our story tonight.

Well, nobody has ever accused Treasurer, Peter Costello, of being a shrinking violet, but addressing business leaders in Adelaide, yesterday, he had a very blunt message for them: government has delivered, now it's the private sector's turn to play its part in reviving the economy. It wasn't quite equal to Paul Keating's quip that business has never had it so good, but it did reinforce the long-held view by anyone taking Treasury advice, that if you get the big picture right, prosperity will flow. In effect, the Treasurer has gambled heavily that despite a major cut in government spending, the boost to savings will lead to a business revival and a positive effect on the current account deficit.

So far, reaction from business has been cautiously optimistic. The Australian Chamber of Commerce and Industry said it was disappointed that cuts had been made to research and development and to export enhancement, but on balance agrees with the overall strategy. But will this translate into major investment, and can the strategy work without significant change to the tax system and to industrial relations.

In just a few minutes we'll talk with two business people who've led our export march into Asia, along with two of the country's most respected economists to try and answer those questions; but first, this report from Bronwyn Reid.

BRONWYN REID: At Serendipity, a boutique ice-cream manufacturing plant in Sydney, expansion is the flavour of the day. Winter sales are well up on last year, and soon three more workers will join those on the factory floor today, to cater to the increasing demand. The risk to move to bigger premises, taken in the unsteady pre-Budget climate, appears to be paying off.

Firms like Serendipity represent a piece of working Australia that the Howard Government is gambling on.

............... When you run a small business, you have to wear so many hats yourself. We have to be the RD department, the marketing department, the accountants, get out there on the floor from time to time when staff are sick and, you know, pack ice-cream ourselves and clear the freezers - do absolutely everything. And every now and then we think 'Gee it'd be lovely to have a little bit of sick leave or some annual leave or a little less responsibility'. As it is, we make or break ourselves.

BRONWYN REID: Much is riding on the competitive instincts of small business Australia. In large part, the Government has hitched its budget predictions of growth of 3.5 per cent and a 14 per cent increase in business investment to the success of small business; that's the 800,000 or so firms that employ on average just seven workers.

PETER COSTELLO: We really believe that the small business is going to be the jobs generator in the future.

BRONWYN REID: But can small business fulfil the Government's expectations. Lower interest rates will help, but in cutting government spending, the Government is preparing for a drop in growth.

........... I think small business by definition is comprised of a large range of individuals who know how to run a business, they know the tight things that they have to address, and when they get a signal from the Government, supported by very, very good programs, they'll adjust their business accordingly, and we'll see growth. And I'm very optimistic that it'll be translated into employment, even though the employment forecasts are relatively modest within the Budget.

BRONWYN REID: The important budget developments for small business include changes to provisional tax - that means they'll pay less tax in advance; a capital gains tax roll-over scheme which will help those businesses wanting to expand; and apprenticeship training grants, so firms won't pay for work hours spent in the classroom. Among the less popular, though, a reduction in funding to the Export Market Development Program; a reduction, too, in research and development tax breaks; and over the next four years, $1.8 billion out of labour market programs.

Brett Fisher's(?) engineering plant is in the early stages of manufacturing electrical vehicles. He's never used the research and development tax break, but he's happy with changes to apprenticeship training.

BRETT FISHER: We can take on apprentices now, and given the right opportunities and investment capital, we could double the size of our business straightaway.

BRONWYN REID: As much as anything, it's the psychological impact of a government prepared to cut its own spending by $7.2 billion across the next two years that is expected to ignite business confidence and lead to investment. Most to gain from the Government's austerity are the big companies like BHP where a tweak in interest rates or minor currency fluctuations can mean gains or losses of millions.

In the wake of the Budget's prediction of an underlying deficit surplus within three years, international credit rating agency, Standard and Poor's, revised the outlook for Australia from favourable to positive.

........... It will lead to some reduced interest rates. The credit rating upgrade itself may not have a direct enormous impact in that we've identified a rating shift from AA to AA-plus as giving a benefit of about 5 to 7 basis points. But I think what we're talking about is indirect effects of the international markets pay a lot of attention to the credit rating agencies, particularly in the United States, and even more so in Europe now. But it just engenders a more positive view towards Australia by the international financial markets.

BRONWYN REID: But it's the daily spending habits of middle Australia that will determine whether the Government's overall growth strategy is successful. There's caution at the moment - private consumption is flat, the growth rate expected to fall to just 3 per cent in this financial year.

The Government hopes to change that by putting close to $20 a fortnight back into the pockets of middle and low-income families.

But at Harvey Norman, chief, Gerry Harvey, doubts the family tax initiative will translate into sales.

GERRY HARVEY: Well, it's not a lot of money and it's mainly with people with families, and they're battling now. So, you're just giving them a little bit more, but they're still battling. I mean, it doesn't induce them to go out and buy a whole heap of new things tomorrow.

BRONWYN REID: Treasury officials now make regular visits to Harvey Norman stores to get a feel for whether the nation is browsing or spending. The fastest growing retailer boasted a turnover last year of $1.2 billion; this year, the figures are down. Any growth will be coming off a flattened base, and that doesn't bode well for the Government's growth strategy.

GERRY HARVEY: We're seeing drops in some of our stores of 10 and 20 per cent on the same time last year. All of our businesses are struggling. Even computers, which is our big business, is not doing as well as last year, although that's picked up quite a bit in the last week with some of our promotions. Electrical is going reasonable; furniture is quite difficult; carpet is very difficult; home improvements, anything to do with the building industry - tiles, vanities and taps - very, very difficult.

PETER COSTELLO: My message to Australian business is now is the time to invest.

BRONWYN REID: Perhaps the Treasurer senses the fickle and irrational nature of business - qualities sometimes just as important as the much vaunted innovation and confidence. In the end, a budget is a bit like business: part management, part risk and part luck.

MAXINE McKEW: And now to our studio guests. Imelda Roche is President of Nutri-metics International - a cosmetics and skin care company which exports to 18 countries. Imelda Roche is also a member of the APEC Business Advisory Council, and tonight she joins us in our Sydney studio.

Dr James Fox is Managing Director of Vision Systems Limited - Australia's leading supplier of technology-based services to manufacturing and defence industries. Employing almost 500 people, his company exports $60 million worth of high-tech equipment each year. And Dr Fox joins us tonight from Melbourne.

Dr Barry Hughes is Chief Economist for the CS First Boston group. Between 1983 and 1988, he was economic adviser to former Treasurer, Paul Keating. And Barry Hughes, tonight, is in our Sydney studio.

Bill Shields is Chief Economist and Executive Director of Macquarie Bank. In previous incarnations, he's worked for the Reserve Bank, the Federal Treasury and the International Monetary Fund. And tonight Bill Shields joins us from Melbourne.

Welcome to all of you. Thank you for joining us.

Imelda Roche, will business run with this Budget as Peter Costello is importuning?

IMELDA ROCHE: Well, I think there'll be many areas of business that will. I think to make the general statement that business will run with it is probably a very broad statement. Business really has been undergoing a fairly difficult time in the last few years. I think most businesses will report that consumer spending has been very flat. So, it will take a little time to wind up, I would think.

MAXINE McKEW: That's been the case in your sector?

IMELDA ROCHE: Yes, it has, actually. We probably would be in what we would call 'a discretionary spending area', and people have been a little restrained, basically, in the last few years.

MAXINE McKEW: So, in the wake of the Budget, what do you expect, then, on the consumer spending side?

IMELDA ROCHE: Well, I would expect that confidence would begin to grow as the general population sees that there is some better environment developing. It will take a little time, but I think people want to be optimistic and people want to be more positive. They've been through fairly lean times and are looking for better times.

MAXINE McKEW: What about the money in the pocket that will start to come through, say, from next January on, via the family tax package?

IMELDA ROCHE: Well, that certainly will make a small difference. I mean, once again, we're not talking about large amounts of dollars, but I suppose any little bit will give a little more confidence in the fact that people will be able to exercise personal discretion a little more over how those dollars are spent.

MAXINE McKEW: So, you're sounding cautious?


MAXINE McKEW: Not doing cart-wheels?

IMELDA ROCHE: No, no, no. No, I think one must .. recognising what business has been through in the last couple of years, I think caution is called for, but optimism.

MAXINE McKEW: In fact, let me ask you: are you in the state where you're having to spend a lot more money on marketing, in fact, to prise open people's wallets to spend on products such as yours?

IMELDA ROCHE: Yes, absolutely. We have to really incentivise (sic) everything we do. We have to incentivise it for the consumer, we have to incentivise for our representatives, our consultants, and basically even to attract people into the business to want to become consultants. Everything in our business has to be incentivised.

MAXINE McKEW: So, no easy path to profits in the '90s?

IMELDA ROCHE: Absolutely not. It's a matter of really running hard very often to stand still.

MAXINE McKEW: Okay. James Fox, how do you see this Budget?

JAMES FOX: Well, I think it's a budget that we can be positive about to the extent that we had to do something about the deficit the Government was running, and we're heading back to surplus. We still have a significant problem with our current account - we buy more than we sell. And I think one of the extremely negative parts of the budget is the treatment of the research and development concession. I think we've gone back 15 years in policy; we've gone back to the guys in white coats and cardigans. We've got now a government trying to pick winners again with bureaucrats who struggle with the broad-based scheme.

MAXINE McKEW: Now, why do you say we've gone to a picking winners scheme?

JAMES FOX: Well, we've reduced a broad-based tax scheme which encouraged an activity called 'research and development' in the industrial area. Jobs and exports are created when you have development work. Australia has always been extremely strong in a science base, but never, ever turned it into products that you exported. And what we've got now is a budget that's taking us back to strengthening the science base. We're taking money out of industry and we're putting it into CSIRO at the top, $100 million or so extra, we're putting it into a grants and loan scheme run by DIST who struggled to run the tax concession as it was, who were behind the demise of Syndication. And by their own departmental reports in the past have slammed the use of grants and loans. So, we've got really back to the past area of policy with the research and development.

MAXINE McKEW: But given that you're doing as well as you are on the export front, do you really need it? I mean, wouldn't you spend that money on research and development anyway?

JAMES FOX: Yes, we would; but we also run with economies around the world. We're a company that's globalised itself as quickly as we can, and so when other countries offer incentive programs that are more competitive, then we respond to that. And certainly that's been the case with Malaysia. It's been totally misleading for our government to say that these incentives are competitive with those other countries; that's just not the case.

I understand why we have to take pain across the board, and I accept that. I have great difficulty with the re-allocation of money out of industry back into the white-coat brigade. I have great difficulty with the penalty placed on engineering students. The one thing this country has had is a leadership position in educated people and we're now starting to disencourage people, or discourage people rather, from going into some of these value-adding courses. So, I find that the HECS treatment pretty retrogressive as well.

MAXINE McKEW: But again, couldn't it be said that anyone who really wants to do engineering is not going to be discouraged by this move?

JAMES FOX: Oh no, but engineering has struggled for a place in the sun in this country anyway, and I think anything that is a disincentive, as marginal as this one is, is something that we just shouldn't be following along with. We should be actually reversing the process. We should actually be encouraging people into some of these programs, and we just don't need more graduates away from the non value adding.

But I really don't want to focus on that, because it's not the main game. The main game, I think, in a Budget that is essentially on track, I think the really bad decision that's been taken has been to reduce the attack on the current account deficit by discouraging research and development activity, and by moving whatever funds were available, biasing those away from industry back into bureaucrats picking winners in Canberra, or relying on the scientific program, as excellent as it is, is not the place to start. We've got to be in the place where industry develops jobs, develops exports and starts to tackle that problem.

MAXINE McKEW: Okay. You obviously don't see the white-coat brigade as providing much in the way of business?

JAMES FOX: No, I don't say that. I think we have a spectrum of activity that is important. Science is important. But we actually have been very good at that. Where we've been very poor is in our businesses, our manufacturing, our use of research and development - our spend rate is one of the lowest in the developed world. And we needed all of the incentives and all of the push we could to encourage people to change their behaviour, and our model has been followed by other countries. We were a leader in this program. We have gone backwards, not forwards.

MAXINE McKEW: Are you saying you'd go offshore?

JAMES FOX: Well, we are offshore. Vision Systems as a company has a major operation now in Malaysia. We've received significant incentives to be there. Now, we'll keep manufacturing in Australia and we'll keep investing here, but it's a question of what rate and where we choose to spend our development dollars. And I can tell you that some of them will happen now in Malaysia where it used to happen here. Now, we'll keep our facilities going here, but the rate of growth will skew. For our shareholders, it's important that we optimise the results for our company; for the country, it's important that we manufacture products here and employ people here and use the intellectual base that we've all paid to create through both education costs and tax.

Now, the fact is that when you reduce an incentive like this and you head money off to the white-coat brigade and the cardigans in Canberra, the fact is that that will put money offshore.

MAXINE McKEW: Let me just quickly ask you about domestic demand, because I know take the same view. You've suffered as has Imelda Roche in this area. But if we do see, say, another interest rate cut, do you think that is going to translate into better domestic consumer demand?

JAMES FOX: I think only marginally. I think we're in for another tough, flat year, perhaps even slightly negative, in my view, from all of our lead indicators for our Australian activities. We're heavily buffered, of course, with our export program. But interest rate cuts, like the tax package for families, will have a small, positive impact, but most businesses are as debt free as they've ever been, so interest rate cuts don't have quite the impact they used to have, but nonetheless there'll be a psychological kick from that and people will make marginal investment decisions a little easier than they might have previously, and households will have a few extra bob to go and spend in the stores or to reduce their own debt. But I think it's all pretty marginal and I don't think we're in for anything like the growth that's being forecast.

MAXINE McKEW: Bill Shields, I mean, the mixed reviews that you're hearing here now, is this consistent with what you're hearing overall in terms of business reaction?

BILL SHIELDS: I don't think so really, Maxine, to be honest. And I'm a bit surprised at the extent to which Jim is negative about this. I think - to go back to a term he used - the real issue here is the main game. And the main game in this Budget is an attempt, really, to boost business confidence and business investment intentions. Now, two days after the Budget, we saw the release of the latest survey by the Bureau of Statistics of business investment intentions, which really, I think, confirm the sort of forecasts that were in the Budget of a 14 per cent growth rate on conservative estimates of business investment over the year ahead.

The reason for that - and this is the very important issue in this Budget - is that interest rates, particularly real interest rates after you adjust for inflation, have come down. Now, a lot of that has actually occurred, as it turns out, before the Budget was even announced. I agree with Jim that a further cut in interest rates may, in fact, be only marginal; but that's on the back of what we've already seen of a 2 to 3 percentage point decline in real interest rates over the past year, and I think that's the real cause of the confidence we're seeing in those business investment intentions.

MAXINE McKEW: Bill, let me ask you, first of all, where do you think we'll see the investment?

BILL SHIELDS: Well, I think it's going to be across a range of industries. The best information we have is that industries will generally share in this. In the ABS intentions that were released just after the Budget, there was a rather surprising up-turn in manufacturing expectations. We know that mining expectations in a number of areas remain strong, and I think in a number of other small and large businesses, and medium sized, you can see this come true. But it doesn't have to be at the end of the day, of course, in all businesses, in order to achieve a fairly rapid growth of investment.

Now, I think what Imelda said about business conditions being competitive and very tough is true, and there's no doubt that has a lot to do with other issues: opening the economy to international competition, and the things we've talked a lot about in the past. But I think on the basis of that, those tough conditions will be translated into new investment decisions by a range of industries. And the surest evidence we have from economic experience is those lower real interest rates over the past year.

MAXINE McKEW: And you're expecting slightly higher growth than Treasury has forecast, is that right?

BILL SHIELDS: Well, I wouldn't be surprised at all if growth is slightly higher than Treasury has forecast in the Budget as, indeed, it was last year.

MAXINE McKEW: How high?

BILL SHIELDS: Well, I think we're talking about 3.5 per cent growth this calendar year, picking up to about 4 per cent growth or slightly higher next calendar year. On a financial year basis....

MAXINE McKEW: Bill, isn't there a problem if growth is too strong, we won't see a cut in interest rates, will we?

BILL SHIELDS: Well, I think you've got to put this in perspective. Now, there's two issues here that are very important: first of all, the Budget, and I think I agree with this, has made the point that if you believe in the strategy in the Budget, that is, the increase in national savings through elimination of the Budget deficit, you can grow more strongly without increasing, as strongly as in the past, the current account deficit. And I would agree 100 per cent with that. I think that is a viable strategy which experience shows us can be achieved.

Secondly, I think it's very important to bear in mind that growth over the year ahead will be based on a variety of different influences. Business investment will be very important; but on the other hand, we're seeing continued growth in consumer income, and I suspect consumer spending, and we will see a recovery through the year in housing as well.

So, I think growth will have an increasingly broad base as we go into 1997.

MAXINE McKEW: Is there a question mark over this Budget, though, in your mind? What are the risks that you can see?

BILL SHIELDS: I think the biggest risk in this whole issue is the assumption that's in the Budget, quite explicitly, that business and consumer confidence will, of course, recover from the poor levels we saw in the June quarter just prior to the Budget, and take advantage, if you like, of these lower interest rates and these better economic and financial conditions, to spend and invest.

MAXINE McKEW: They just might sock it away?

BILL SHIELDS: They just might not. Now, as I said before, I think, the business side is less of a risk, because we've already seen the response of business and we've seen that incorporated, if you like, in these investment intentions. I think there's far more uncertainty myself on the consumer side where there is genuine concern in the community about the nature of some of the cut-backs that have been put in place.

MAXINE McKEW: Now, Barry Hughes, you don't think we'll even hit 3.5 per cent, do you?

BARRY HUGHES: No, I'm with the business people. I think Bill is rather getting ahead of himself. I think over the course of the next .. we will get the recovery trend coming through, but it'll be running fairly late. Over the course of '96-7, we're likely, I think, to see some pretty ordinary bottom line growth numbers with unemployment drifting up a little. And it won't be until the middle of 1997, into the second half, before we see a genuine recovery under way.

MAXINE McKEW: So, spending to stay flat?

BARRY HUGHES: Well, consumers are doing it pretty tough. There doesn't seem to be too much employment and wages growth in the tank to fuel consumer spending. Housing will pick up, but that's a next year story rather than now. We still seem to have an excess stocks problem in manufacturing and wholesaling. Bill is putting an awful lot of faith on an investment recovery and on one particular survey out of the ABS. Two days before that survey came out on capital goods intentions, we had the national accounts. The Capex survey which Bill refers to, covers 77 per cent of investment and showed a strong increase for the June quarter. The national accounts on Tuesday covered the whole of business investment and had a radically lower figure for the same area.

MAXINE McKEW: All right. So, what do you see on the investment picture?

BARRY HUGHES: So, what we have to look at is not just that survey, but surveys that come out from business associations and the like. I think there will be a pick up in business investment, but I'm yet to be persuaded it'll be anything like as strong over '96-7 as the Treasury and evidently Bill is suggesting.

MAXINE McKEW: But in having tackled the hard work of fiscal repair - and this goes to the heart of the argument. I mean, what Peter Costello would call the 'hard yards' .. I mean, you don't see that as being sufficient to give growth the kick-a-long?

BARRY HUGHES: What Peter Costello has done is try to remove - and reasonably successfully - an obstacle to growth occurring. Every time we've grown, we've run into a current account deficit, so the idea is you get some extra saving there to prevent that happening. So that whenever growth occurs, we'll face less obstacles. Now, there's nothing in the Budget itself, it seems to me, to propel short-term growth; if anything, the reverse as a result of the fiscal negatives. And for growth to occur, I think in his policy, we're basically looking to the Reserve Bank. And I would still expect, because I expect the economy to be relatively weak, I still expect on balance to see a second rate cut later this year.

MAXINE McKEW: And you also see a link, Barry, don't you, between savings and unemployment, don't you? I know you've got a graph here. What's an economist without a graph. So, we'll put it up at some stage and you can just talk to that.

BARRY HUGHES: Okay. A lot of people have been complaining about the sharp fall in Australian saving, public sector dissaving, household saving down, and that graph....

MAXINE McKEW: Barry, that graph is in front of you, so just talk to that, if you would.

BARRY HUGHES: That graph shows you that in the 1960s, we were batting around about a 24, 25, 26 per cent national saving rate, and you can see that declining through the '70s and declining sharply in the early '90s. We've picked up to, what, 18 per cent. Now, what Peter Costello has done, effective on Tuesday night last week, is effectively to add of the order of one to 1.5 per cent to that national saving rate.

But as you can see, also on that graph, is the national unemployment rate multiplied by minus one. As you can see, they're like Siamese twins. And basically what I get out of that graph is to say without growth, without high-ish growth, certainly stronger than 3.5 per cent, without high-ish growth getting the unemployment rate down, we have very little hope whatsoever of returning to the national saving performance of the '60s and the early '70s.

MAXINE McKEW: Bill Shields, how do you see this argument?

BILL SHIELDS: I think it's very important that we look through that graph a little bit and try and understand what's behind it. Now, it's very interesting if you try and break down the trend that Barry has drawn attention to in national savings. It's declined since the 1960s by about 8 percentage points according to the chart.

MAXINE McKEW: Let's just put it back up again. Say that again, Bill.

BILL SHIELDS: So the average in the '60s was certainly much higher and the total decline is about 8 per cent - of that, 5 per cent is because of the decline in government savings; only 3 because of the decline in private savings. Now, I think we go back to what Jim Fox referred to: this is the main game. What this Budget is trying to do is restore that decline in public sector savings - not entirely in the next two years, but certainly moderately over the next two years and perhaps more substantially on a 3 or 4 year horizon.

I think also it's important to bear in mind that this in many people's view, and experience, I think, supports this quite strongly, this is sufficient to see lower real interest rates in the economy, more stable real interest rates than we've had during the '70s and '80s when we saw that sharp deterioration in government savings, or in simple language: very high budget deficits.

Now this, all experience tells us, is a quite positive influence on business investment decisions over time. I think we've got to be very careful of timing here. Barry talked about what we see in the economy now, and now largely means data we have for the June quarter. But the June quarter itself was affected by this pre-election rhetoric and the very negative expectations we had of what the Budget could do - many of which have seemed to have disappeared more or less within two or three days of the Budget. Moreover, I would say, Maxine, if we look behind the growth figures prior to the Budget, that the private economy actually did continue to expand. Now, it slowed down certainly in the June quarter from the March quarter, but if you take it together, the first half of '96 saw private sector demand grow by around about 2.5 per cent or greater, and that's not at all a bad base to build on going forward in the next 12 months.

MAXINE McKEW: Barry Hughes.

BARRY HUGHES: Well, first of all, the fact that the public sector dissaving is behind that big fall from the '60s, doesn't surprise me. If you've got 8.5 per cent unemployment compared to 2 per cent, you're paying out one heck of a lot more unemployment benefits and you're collecting less taxes. So, I'd expect the public sector to take a big hit. In terms of the immediate growth future, Bill, essentially I think we're agreeing in terms of the fact that down the track we're going to get a pick-up, but you see it coming very much more quickly than I do. So, we have an argument about timing. I'll stick to my views [...] with what I'm getting as anecdote from business right now.

BILL SHIELDS: Maxine, if I could make one point.

MAXINE McKEW: If you could quickly, yes.

BILL SHIELDS: Make one point: I think many economists would agree - Barry may not - that the expansion in public sector deficits that began in the mid-70s, led the decline we saw in employment opportunities and the increase in unemployment in Australia, not vice-versa.

MAXINE McKEW: Well, Barry, do you agree on that?

BARRY HUGHES: No, that's just not true. We collapsed in terms of unemployment in the second half of 1974, and at that time we were running a domestic surplus.

MAXINE McKEW: Okay, Barry, I wanted to ask you: you made the point before you see unemployment rising - to what figure? Are you putting a figure on it?

BARRY HUGHES: I think unemployment will probably drift up towards around about 9 per cent. Incidentally, the Government .. the Budget forecast has unemployment drifting up through the course of the year, before coming back down to about eight and a quarter on June next year. I think that's a touch optimistic and a touch too early.

MAXINE McKEW: Now, Imelda Roche, can I bring this back to the question of employment. How do you see this - whether it's 8.5, 9? Do you think we may see a rise in unemployment before an improved picture?

IMELDA ROCHE: Not necessarily, actually. I mean, there's obviously been a downsizing actually in government and in large business, but I think that if there is increased optimism, small business may be encouraged to take on a little more in the way of taking up the employment service. But I do believe that we need to do more to encourage small business to do that, and that really is where the great hope is.

MAXINE McKEW: Is there still a wariness when you consider, when a business such as yours considers putting on, say, an extra person?

IMELDA ROCHE: Well, our business is a little beyond those considerations of really one extra person. If we need a person, we have to put them on. But I suppose my comment really relates more to much smaller business where really the compliance regulations that small business has to comply with, and of course the very real restrictions placed on single operators and those that have two or three employees, I think it is all too hard, basically, at the moment. And we really have to make it easier.

MAXINE McKEW: Do they see too many penalties? Is that what it is?

IMELDA ROCHE: Yes, yes. I think sometimes it really is there is greater benefit to the employee than there is to the person who takes the risk in being the employer, and that balance has to change.

MAXINE McKEW: James Fox, would you agree with that? Still too many rigidities in the labour market?

JAMES FOX: Yes, I do. And I think one of the tasks the Government has to tackle pretty quickly, so that both sides of this industrial relations argument get to hear the word 'flexibility', and it's important that people are able to move from one job type up to another within an organisation without creating stress. And I think we do have to get rid of this unfair dismissal law that's come in recently. I think employees deserve protection, but at the same time they don't want to be discouraged from getting a job because businesses are wary of it all.

So, I think that sort of rigidity in the industrial relations area has got to go - all parties, and it's not just ripping into those on the employees' side or the employers' side. I mean, there are lots of examples where we need more flexibility and certainly employment only will .. I mean, I see negative employment growth this coming year, apart from those of us that are involved heavily in exports, and we'll grow. Otherwise, the employment law is a nightmare and rigidity in the workplace is equally a nightmare, and we've still got rigidities in our waterfronts. Our waterfronts haven't moved on at all. So, there are some big challenges on the industrial relations side.

MAXINE McKEW: Would you see, though, the passage of the industrial relations Bill with some amendments from the Democrats, would you see that as a significant boost?

JAMES FOX: Yes, I would. I don't think anything in this is going to be significant. I reckon we're going to creep forward carefully over the next 18 months or so. I really don't see any big lifts, but it's all small incremental positive influences, and that would certainly be another one.

MAXINE McKEW: What about industrial unrest? Would that be one of the real hiccups on the horizon?

JAMES FOX: I think the next six months, I think we've already seen with the Parliament House incident and the back-to-the-future petrol strikes that we'd all forgotten existed, they're all signs that we are heading into some, I think, difficult times, and that's really even before cards are being put on the table. That's all the sabre rattling stuff. So, I think we are heading towards some fairly tough industrial scenes, which I think is highly regrettable, because we've done a pretty good job at managing some change over the last five years without all this, and I really think it's politically driven. I think when you get down to the average guy in the workplace, and the average manager, they really aren't on about this. So, I think it's pretty disappointing to see it happening.

MAXINE McKEW: Barry Hughes, do you think that might be right if we do see that .. you know, if you like, more industrial unrest that that's going to knock around this psychological kick that everyone is waiting for?

BARRY HUGHES: It also might hurt the long bond rate and the currency effect if it were to happen; that's true.

MAXINE McKEW: Right. And do you think it will? I mean, Bill referred before to the problem of a lack of social cohesion.

BARRY HUGHES: I'm optimistic enough to believe that with some disruption, we can get through the general run of enterprise bargaining, but I'm still very much concerned about the cabotage issue and the general idea of a national shipping strike. I think that one hasn't gone away.

MAXINE McKEW: Bill Shields?

BILL SHIELDS: Well, I think we're all getting a bit too depressed here, Maxine, to be honest. I mean, my interpretation of the last three to four years is the spread of enterprise bargaining and the way it's worked in the labour force has been far more successful than many of us, and that just is not including the pessimists, but some of us who are confident about the outcome, worked better than most of us could have expected. Now, I think that process will continue. Business has been asking for a long time for the Budget to be repaired. Business has been asking for industrial relations. There are other things to be done; there is no doubt about that, and the Treasurer has indicated he will get on with those in the course of the next year or two. The timing is not yet certain on things like the waterfront. So, if we're not going to get more confidence out of all this, I'm not sure what's going to do it.

MAXINE McKEW: Well, I think we'll come back to you all in six months' time and find out whether we're creeping or galloping or somewhere in between.

Okay. Thank you all very much.