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Monday, 14 October 1991
Page: 1799

Mr GIBSON —-My question is directed to the Acting Treasurer. Can he advise the House what progress has been made on reducing Australia's rate of inflation? Is it intended that additional measures be taken to lock in Australia's lower inflation regime?

Mr WILLIS —-The Government has achieved substantial progress in cutting the inflation rate. The peak of 8.6 per cent in recent times was reached in March of last year. That rate has now been reduced by more than half to 3.4 per cent for the last 12 months, which is the lowest rate since March 1970, if we take out the unusual effect caused by the introduction of Medicare in 1984. Our inflation rate is now clearly less than that of our major trading partners, who average 4.3 per cent; we are effectively one per cent below that. The OECD average--excluding Turkey, which has a rate of inflation of around 70 per cent--is 4.7 per cent; we are markedly below that. Our rate is now also less than those of the traditionally low inflation developed countries, such as Japan and Germany.

Of course, it is important, as the question indicates, for us to lock in that lower rate of inflation, and present policies are designed to achieve that. We have noticed that in the last half year there have been exceedingly low levels of inflation, with minus 0.1 per cent as the inflation rate for the first half of this year, and that rate may well go below 2 per cent by the end of this year.

Such a rate would not indicate our underlying rate because it is affected by the unwinding of the impact of the greatly increased oil prices due to the Iraq conflict which pushed the December quarter CPI up to 2.7 per cent and then, with the unwinding, has given us a very low rate of inflation, virtually zero, in the first half of this year. Of course, the Budget forecast is for an inflation rate through this year, from June to June, of 3 3/4 per cent. That is a pretty good indicator of the underlying rate of inflation. It is a rate which remains below those of our major trading partners.

Of course, it is important that we are able to keep inflation at that kind of level, because it provides a sound basis for economic growth; it will enable further progress in reducing interest rates; it will maintain and, indeed, improve our international competitiveness; it will enable further progress in reducing our balance of payments current account deficit; and it will enable us to achieve the early stabilisation of our foreign debt.

All of this progress, which of course is very substantial, would be lost if the Opposition were to gain office, because it has made two major commitments about the inflation outcome: firstly, it has said that it would commit to keeping inflation between zero and 2 per cent, despite the fact that no developed country in the world has inflation in this range or feels able to make such a commitment.

Dr Hewson interjecting--

Mr WILLIS —-None has been able to make any such commitment and none has achieved it. Secondly, the Opposition, of course, is committed to the introduction of a goods and services tax which would push inflation back into double digit levels. The fact that these two commitments are absolutely at odds--that is, a commitment, on the one hand, to zero to 2 per cent and the commitment, on the other hand, to do something which will push inflation back up into double digit levels--does not seem to faze the Opposition too much.

Of course, the Leader of the Opposition rationalises this apparent enormous conflict by saying `Ah, an increase in the GST is not inflationary; it simply puts up prices'. That is his answer; that is his rationalisation. It is one which I think the public of Australia are going to find exceedingly difficult to understand. Rightly so, because obviously the GST is inflationary. Higher prices are inflated prices. It will push the CPI up, which is the measure of inflation. So do not tell us it is not inflationary. It is an absurd argument to say that it pushes up prices, not inflation.

Of course, the low inflation psychology, which is now being developed and which is so important to our future, will simply be blown away by the introduction of something which takes us back into double digit inflation. We will have wage earners, businessmen, investors and money market operators all starting to think again in terms of higher inflation and taking their decisions accordingly; in other words, taking inflation creating decisions.

The only way that a government faced with that circumstance can seek to overcome that problem is to pursue tougher macro-economic policies to try to squeeze out the inflationary impost that it has put into the economy. By adopting tougher macro-economic policies, either by fiscal and or monetary policies, that is, jacking up interest rates, it will squeeze the economy down, it will reduce job growth and it will increase unemployment so as to squeeze the inflation out of the system that it will have put into it the first place.

There is a conflict in the two positions that the Opposition is essentially pursuing. It can rationalise it in the end only by pursuing a course which would virtually sedate permanently the Australian economy, putting it in a position of no growth and of high unemployment so as to ensure that it could get to an inflation level that no-one else can get and to squeeze out the high inflation which it would have put into the economy in the first place. It is an absurd policy and one which would be exceedingly damaging to this nation.