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Thursday, 26 March 1987
Page: 1590


Dr WATSON —I refer the Treasurer to the well known and fundamental relationship between expected inflation and long term interest rates. Given the statement in Economic Planning Advisory Council paper No. 26 that the market expected continued higher inflation in Australia and todays reported comments by the Managing-Director of the National Australia Bank, Mr Nobby Clark, that he expects inflation to rise to 10.2 per cent next year, how are long term interest rates going to record a significant and sustained fall from their current levels?


Mr KEATING —If the honourable gentleman had been studying the markets in the last day or two, he would have found the 10-year bond rate declining over the last week or so as conditions over the year are starting to unfold. But this is just simply a question about inflation. The Government has made it clear why our inflation rate at the moment is where it is. I remind honourable members again that when this Government came to office the inflation rate was 11 per cent. We succeeded in bringing it down to 5 per cent for the year to March 1985. It has risen temporarily as the result of a major depreciation of the dollar, which lifts the price of imports. The price of those imports is being measured as they leave out economy to surrender their market share to local product. For a decline in the exchange rate and a lift in competitiveness, there is an unavoidable price to be paid with a temporary lift in inflation, which then must be addressed by broader anti-inflation policy.

The difference between this Government and the Opposition is that this Government has an anti-inflation policy and it has in place a wage policy which will track Australian inflation down so that not only will we emerge from a major depreciation with the most competitive economy that we have had since 1969-well able to export and import compete for the first time in memory-but also inflation will abate as a result of the Government's policy. The only policy that the Opposition would have to deal with inflation would be monetary policy. The Opposition rejects all forms of wage policy. It says that it is not interested in discussions with the unions. It rejects any notion of an accord. It would simply try to squeeze inflation out of the economy by squeezing growth or, in other words, by ramming the economy into a recession to cut the inflation rate, as it tried to do and in fact succeeded in doing in 1982 when it shoved us into the first domestic recession, the first negative growth, in 30 years.

By contrast, this Government succeeded in getting the inflation rate down to 5 per cent. It would have been well below 5 per cent now but for the depreciation. But, in the wake of the depreciation, we now have a very competitive economy. Given that we have broken that link between wages and the indexation of the inflation rate, we will see with the decline in real wages a decline in the inflation rate and with it, of course, in the long term bond rate. So, perhaps my friend on the back bench, who is interested in economics, might study the performance of the coalition through the 1970s and try to come to terms with its inability to run an anti-inflation policy and a growth policy at the same time, which gave us an 11 per cent unemployment rate and an 11 per cent inflation rate on terms of trade massively more advantageous than those we have today. The honourable member might ponder how the previous Government got into that mess in 1982 and why the coalition in government would not be in the same mess in the future if all it had to rely on was fiscal and monetary policy. Following his naive question about the long term bond rate and inflation, the honourable member should address his mind to the underlying policy issues. It is only this Party that has the capacity to drag inflation down. It is only this Party that has been able to restore the basis of Australian competitiveness. It is only this Party that has an accord with the unions. That is why it will be this Party that will get returned at the next election because the public will not want another recession from John Howard.