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Wednesday, 9 March 1977
Page: 51

Mr WENTWORTH (Mackellar) -Her Majesty's speech expressed the hope of economic progress. That hope cannot be realised without positive policies and positive action on our part. It is possible to argue about the depth of the recession or the extent of the recovery; but no reasonable argument is possible against the proposition that our economy is flagging and should be quickened. One thing that would do that is tax reduction. Surely nobody would argue that tax reduction would not quicken the economy. It would provide a stimulus in 4 ways: It would reduce costs by a reduction of indirect charges; it would be an anti-inflationary measure; it would add to incentive for those who find their marginal earnings heavily taxed; and it would increase consumer spending.

Why not, therefore, have tax reductions? The Prime Minister (Mr Malcolm Fraser) has given us some reasons. I want to summarise the argument that he has put forward. He says that tax reduction would increase our deficit; that if we did not fund that deficit by loans there would be an addition to the money supply, which would be inflationary; and that if we did fund it by extra loans there would be a rise in interest rates, which would impede recovery. So on those grounds, putting that argument forward, the Prime Minister says that at the present moment tax reduction would be irresponsible. For the sake of the present argument, let me accept 2 statements by the Prime Minister which I consider questionable. I consider it questionable that he should describe the capital expenditure of over $3,000m in the Budget as being a deficit. I consider it questionable that an unfunded deficit would always add to inflation and raise prices, although I concede that in some circumstances it would. But these are things which are irrelevant to the proposition which I am presently putting forward. In my view there is a way of funding the deficit without putting up interest rates. That is the proposition that I want to put to the House tonight.

I can see the relevance of the argument of the Prime Minister and the Treasurer (Mr Lynch) that if they go to the market to raise an extra $ 1,000m in order to cover tax reduction, shall I say, interest rates will rise. I can see that that would occur if they went to the market in the conventional and ordinary way. But this is where I think they are wrong. It is not necessary to confine oneself to these methods in approaching the market. In the old days- not so very long ago- a loan was taken up to a large extent by private subscribers, not by professional investors. This is not longer the case. Private subscriptions are relatively small today because naturally those who otherwise would purchase bonds are frightened by inflation. They say: 'Why should we put money into long term bonds at 1014 per cent interest when we can get 1 1 per cent or 12 per cent on the market where it is equally safe and where we have a chance of retrieving our money fairly quickly should we want it?'

Mr Cohen - Such as in the Parkes Development company.

Mr WENTWORTH - As my friend across the chamber suggests, sometimes they may be wrong and may make a misjudgment. But in general, for example, they would think of call deposits with building societies and things of this character which rightly they would judge as comparatively safe. So they do not go in for loans. Still, this market is one which should be available and it would be available if we were to offer to the public bonds which were indexed both as to yield and as to redemption. This would attract the little men. I would not suggest that we make bonds of this character available to the professional market.

I suggest that we put the bonds out with 4 reservations. First, I think that they should be sold only to Australians who are enrolled on the Commonwealth electoral roll. Secondly, I suggest that they be non-transferable, that is to say, that when someone buys them they would be his and they would be redeemable only on his death; but they would be a permanent investment, permanently anchoring the funds in the market. Thirdly, I suggest that they be fully indexed on the consumer price index both as to yield and as to ultimate redemption. Fourthly I suggest that any one holder should be allowed to purchase only a limited quantity of bonds. This would keep the professional investor, the institutional investor, the speculator, out of this market. It would be a market for the little man, the person who we really want to get to subscribe to the bonds and who by subscribing would have the security of his income for life protected against the erosion of inflation, and the return of capital after death to his estate for the benefit of his children again would be protected from any inflation erosion.

I suggest that in addition to selling normal bonds we should do something which was centuries ago a part of public finance but which has been allowed to fall into desuetude. We should sell indexed annuities, annuities on the whole of life either of the person who purchases them or jointly on the lives of him and his spouse. They would pay their amount in at the present moment and they would purchase for each $100 a certain amount of annuity which would be expressed as a sum of so many dollars a year but which would be indexed and would go up with any rise in the CPI. Those purchasers would have an income for life secure from inflation. I suggest that this is something which would be attractive to many people and particularly to many people who would like to split their capital and put some of it into bonds so that their children would have it erosion proof at the time of the investor's death and some of it into an erosion proof annuity which would pay of course at a great deal higher rate than the bond rate so that they would have that at the higher income during the course of their life. Again it would be erosion proof.

I think this scheme would be attractive to very many people. I do not believe that it would be difficult to raise very considerable sums in this way. While I am suggesting that the interest rate be comparatively modest both for the bonds and for the calculation of the annuity- which of course would depend upon the age of the purchaser- I think that there would be no difficulty whatsoever in the Treasurer raising whatever money he wanted to cover what he calls the Budget deficit but which is really the amount that we spend on capital works from the Federal Budget. There would be no difficulty whatsoever in raising $3,000m or $4,000m a year on the Australian market from people who would want to get security for life against inflation. It may be said that it is expensive for future Federal Budgets, but this surely is a delusion. The Federal Budget draws its revenue from the incomes of the time. If the CPI increases, without any increase in rates and, allowing for the full indexation of income tax which we brought in, there would still be no difficulty at all in meeting the amount. The Federal Government can do in this what no other concern can do. The Federal Government itself has its revenues inflation proofed.

I think that there is nothing extravagant in this proposal. All I am suggesting is that the amount we raise be the amount we spend from the Budget on capital works. It is not in any way outrageous or extravagant to say that capital works should be financed by loan. Sure, the Federal Treasury will be giving up the opportunity to swindle its citizens through inflation. That, of course, is something which revolts every Treasury officer but it should not be something which revolts every member of this Parliament. To give up the chance of swindling citizens for the future is quite different from incurring an unreasonable expense in the loans to them for the future.

If this course were adopted the Federal Treasurer could raise his loans without going to the professional market. This would mean that he would be able to say to the professional market: 'Interest rates down'. This is one of the most important features of what I am putting forward. Interest rates in Australia are extravagantly high. They are not high because we need to protect our currency against an outflow of funds, the classical mechanism. On the contrary, we have had to protect our currency from an inflow of funds by variable deposit requirements which was simply a means of keeping up local interest rates or, shall I say, preventing the inflow of funds from pushing local interest rates down. The Treasurer- we can understand what he is saying -says: 'I have to get funds. I have to raise the money. I have to get subscriptions and I will not get subscriptions unless I put up my bond rates'. By putting up his bond rates the Treasurer is putting up every other rate in the market.

Let me put this quite plainly. Australian interest rates are extravagantly high not because of any pressures of foreign funds but because the Treasurer in order to raise his local money has to offer high interest rates. I am saying that if we look at this in a sensible way and if we go for indexed personal bonds and indexed personal annuities- which I think might be even more important than the bonds- in quantity the Treasurer could tell professional investors to go to hell. He could offer bonds only at a low interest rate because he would not be worrying whether the professional investors subscribed to them or not. This would immediately revivify the whole of the economy. If one can get interest rates down business will be picking up. This is the mechanism to do it. It is not unfair on the insurance companies, for example, because the insurance companies- I speak particularly of the mutual insurance companies which do not have any shareholders- will make large windfall gains. The capital value of their portfolios will rise substantially as interest rates fall. They will be able to compensate themselves for the fact that their future investments will be at a lower rate of interest.

One may say that this is a simplistic plan. It is in a way. It has a simplicity, but it will work. It will not put a strain on the other capital markets because as moneys are withdrawn to pay for bonds they will be disbursed by the Government, particularly in the form of tax reduction. As I said before, this will stimulate the whole of the economy and make all the difference to our present outlook. At the present moment we are cabined into stagflation. The economy is stagnant and it is not going ahead as it should.

I offer in this way 2 things. I offer, firstly, a way of reducing taxes without inflation. It will reduce taxes in a way which is counter inflationary because it will enable costs to be reduced and it will enable indirect charges to be lifted. Secondly, I offer the reduction of interest rates throughout the whole of the Australian economy. I am not suggesting that one takes any terribly drastic action. One may want to do things gradually and not in a very disturbing and drastic way. This simple measure will change the whole outlook of the Australian economy and get us out of the morass in which we are still floundering.

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