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Wednesday, 9 March 1977
Page: 53

Dr CASS (Maribyrnong) -The atmosphere this evening seems nice and relaxed, with very few fans on the benches and even fewer in the galleries. So one can be excused for not making a violent speech but for musing on the problems facing us. I will be interested to read in Hansard tomorrow what the honourable member for Mackellar (Mr Wentworth) said. I feel it is a bit of a dream. I may be wrong; I may have missed part of the logic. Certainly the point about purchasing annuities is already good socialist philosophy. In our terms it is called a national superannuation fund. One pays for it while one earns, and gets it back when one retires. The only problem is that that does not necessarily give one a lot of funds to spare. It does not really allow one to drop all that much in taxes because, after the scheme has been in force for a time, the stage is reached at which people need to be paid back their money. If there is any inflation- there is likely to be- the annuity has to be at a higher rate than the rate at which they contributed. So I do not think it is quite as simple as the honourable member said. I may have missed some of the logic. I shall read Hansard carefully before I completely dismiss the suggestion. I thought there was something missing. The Queen, in her Speech, said:

Australia has experienced economic difficulties in recent years; my Government has given first priority to restoring the economy and will use all the resources at its disposal to achieve this goal.

That is very good. The Government acknowledges that we are in economic difficulties. I say that because the Government wrote the Speech. If one is in difficulties, I guess the first thing one has to do is to assess the problem. The Government's assessment of the problem is that 'the prosperity of the Australian people depends on the strength of its productive private sector, on its manufacturing, mining and rural industries'. I take it that that is a concession that there is something sick in the state of the private sector. If it were all right we would not have our problems. Hence that statement. The Speech continues:

My Government is providing incentives and encouragement to the private sector, and is reducing its own relative demands on national resources so that private industry may have room to grow, provide employment and increase the well-being of all Australians.

That is marvellous. This is a private enterprise economy. I am tempted to ask: If it is private and if it is enterprising why is it necessary for the Government, a sort of socialist arm of society, to provide incentives and encouragement to the private sector? Why is private enterprise unable to get itself going? The truth is that in this country private enterprise has been neither private not enterprising for the last 50 years. In fact, enormous props are provided by the Government for the private sector.

Let us discuss the moves taken by the Government to encourage the private sector. One recent move was devaluation. It was based on the simple proposition that among other things devaluation decreases the cost of Australian manufactured goods to buyers in other countries. That is good. That means that other people elsewhere will be keener to buy our goods. So we earn more money; we export more. That is the theory. In an article in the Sydney Morning Herald of 1 December a gentleman by the name of Clive T. Edwards wrote:

The 1 7.5 per cent devaluation of the dollar is a bird of ill omen for manufacturing industry in Australia.

Most Australian manufacturing firms are highly protected from import competitions by tariffs, import restrictions and other barriers to imports. By making imports dearer -

That is what devaluation does- the devaluation will allow these firms to raise the price of their goods by some 1 7 to 20 per cent.

That is funny. That was not what was supposed to happen. That is what this Clive T. Edwards claims will happen. That means that the firms increase their prices. They can obviously make more profit. That is why they are there. I am not necessarily grizzling about it. I want to pursue the logic of the private enterprise system. Devaluation enables them to raise their prices because they are selling whatever they can hope to sell overseas anyway. They can just bump up the price a bit. The overseas companies still pay the same amount, in essence. The home company earns more in Australian dollars because of the trick of devaluation. That increases the cost on the Australian market. That is not all. The article also states:

But most manufacturing firms depend heavily on imported inputs . . . The price of these inputs will rise some 17 to20 per cent . . .

The increase in the price of imports will add significantly to inflationary pressure.

I thought the point of all this exercise was to encourage private enterprise. One of the reasons for doing it was to control inflation. There is an inherent illogicality in it if this gentleman, who is a senior lecturer in economics at the Australian National University, knows what he is talking about. Presumably he does.

Mr Ellicott - Maybe he does not know.

Dr CASS - The Minister mumbled: 'Maybe he does not know'. That is all very well. He is one of those people who advise us in Treasury and everywhere else. So the increase in the price of imports will add significantly to inflationary pressures. I notice that the Minister is mumbling away that that is all nonsense. Maybe, but let us see if that is what is happening. The article continues:

But this is not all. The devaluation adds to the profits earned in the industries which play a crucial role in the determination of award wage rates . . .

This in turn is going to encourage increases in wages. We have a funny theory in this country that as profitability of private enterprise goes up everybody should share in it, including the workers. So if the profitability of an industry goes up the wages in that industry go up. That is what the whole arbitration system is about. No one up till now has grizzled about that proposition. So the very move we have taken to try to control inflation, namely devaluation, is going to increase the cost for the manufacturing sector; it is going to increase the profits of those particular sections that are the pace setters in wage fixing. So therefore wages are going to go up which of course will flow across the board and increase the cost for everybody else.

I am not arguing against wage increases. I am just pursuing the logic as put by a gentlemen who ought to know and who writes in defence of this private enterprise system. He concludes:

On balance, devaluation itself provides little net gain to manufacturing firms.

But there is more. First, devaluation will be accompanied by supplementary policies. In particular, credit will have to be kept tight if there is to be any semblance of an antiinflationary policy. Interest rates will therefore be high and will rise over time.

The incentive to invest -

And here comes the rub- in the expansion of manufacturing activities will be small because the cost of borrowing will rise . . .

The Prime Minister (Mr Malcom Fraser) said he was trying to encourage the private sector to expand, but the effect of what he has done is going to inhibit that expansion. The article continued:

A decision further to restrain Government spending will exacerbate the depressed state of consumer demand.

This is because the private sector will not be able to borrow as a result of interest rates being too high. Therefore it will not be able to invest and as a consequence it will not be able to build new factories. The only area in which we will get things built will be in the public sector.

Honourable members will recall that the Prime Minister in the speech he gave to the Queen suggested that we need to cut down on the resources allocated to the public sector so that we can encourage the private sector. The author of the article says that that decision will further exacerbate the depressed state of consumer demand. That is not a mystery. If we spend public money on public works the money is used by the private sector. The private sector builds schools; it builds hospitals, and supplies the equipment and everything. In other words, this so called inhibiting of public spending, the terrible extravagances that the last Labor Government indulged in, the sort of waste of public money that this present Liberal Government is going to contain, control and restrict means that in fact action controlling public spending is harming the private sector. It was nonsense to suggest that the public sector had too much of the resources because the resources inevitably flowed from the private sector itself when it did work required for the public sector. The article in commenting on the question about the other effects of devaluation stated:

Second, the devaluation will provide a substantial boost to the rnining industry.

That is lovely. We have been told that that is what we need. The author of the article then puts forward a note of caution when he states:

Added to the concessions extended to the mining industry in the Budget, the devaluation provides a substantial stimulus.

That seems good. The article continues:

For the manufacturing sector, this spells disaster. Capital inflow associated with mineral projects will improve the balance of payments, which was in deficit for speculative, capital account reasons only.

In other words, money dealers were trying to make money out of us. The article continues:

In the longer term, the stimulus to mineral sector output most of which is exported, will add to the balance of payments surplus. Australia 's international reserves will rise dramatically, and the Government of the day will be forced to appreciate the dollar or reduce barriers to imports.

There is the rub. The article continues:

Manufacturers would naturally expect the Government to revalue rather than reduce tariffs and import restrictions

.   . Mining firms and rural interests are now more fully aware of the impact of high import barriers on their earnings. They will press for tariff cuts rather than revaluation.

In other words, these crucial parts ofthe private sector are at war with one another. What helps the mining sector defeats the manufacturing sector and vice versa. Of course, the rural sector is squeezed in the middle anyway. The article continues:

In the future there will be growing pressure for tariff cuts in preference to revaluation as Australia's balance of payments improves. As tariffs and import restrictions are lowered, manufacturers will feel the pressure of Asian competition far more acutely than they have in the past.

On balance, the manufacturing sector will suffer severely as a result of this devaluation ... If the Government succeeds in restraining inflation in the longer term, manufacturers will suffer as a result of a substantial up-valuation of the Australian dollar -

In other words they do not win whichever way it goes- as the mineral sector expands.

This is because the mining sector will earn the money. The article continues:

If the Government fails to restrain inflation, manufacturers will be brought to their knees through massive cost increases. Regardless of what happens, there is no joy in devaluation for manufacturers.

As long as the manufacturing sector remains depressed, unemployment -

Which is a bit of an aside- will remain high.

The Government has not taken much notice of unemployment. In other words, in summary, the joyous news for the productive private sector is that revaluation will give a short term gain- very short- which will lead to increased costs of production due to higher costs of necessary imports. At the same time the short term profit increases will prompt increases in award wages. The point is that the gains from revaluation will be short term only and while profits go up in that short term it will prompt wage increases. In the longer term costs to the manufacturing sector will go up with wages and increased costs of imports and so they suffer the pinch. I will not repeat all of that argument. So long as this pressure remains on the manufacturing sector unemployment will persist or even increase. Prices will continue to go up and things will just go from bad to worse. That is not my theory. That is what is happening. That is what the erudite gentleman was talking about. He gave us observations of what is happening.

We are faced with the position that the recession that the Government while in Opposition claimed we caused is still with us. The Australian Financial Review of 4 March in an article entitled The Recession That Will Not Go Away' stated:

In 1 977 no economy is an island.

Although this is a self-evident truth it is one which is often ignored in the public debate about economic strategies in Australia.

Indeed, in the last election the coalition parties successfully ridiculed claims by the Labor Party that external factors had been a major contributing cause to the high level of inflation.

Having adopted such an approach on the hustings it is a little difficult for the present Government to turn around and blame the rest of the world for its problems at the moment.

But that is precisely, of course, what it is trying to do. So what of the future? On 29 December 1976 an article entitled 'Economic forecast: gloomier' written by Kenneth Davidson appeared in the Melbourne Age. The author of the article referred to the economic outlook of the Organisation for Economic Co-Operation and Development. The article stated that the 7 major members of the OECD were expected to have an annual growth rate of 4.75 per cent. These countries included Britain, France and so on. The OECDs December forecast of growth rate was not 4.75 per cent but 3.5 per cent. This was insufficient to take up the growth in the work force of member countries; in other words despite the increase, unemployment increased. Before devaluation the OECD team studied the Australian economy and said that while this Government's policies would lead to a reduction in inflation this alone would not result in the recovery of economic growth. The article went on:

Implicit in this report was the suggestion that the Government would have to undertake expansionary policies early in the new year if growth of 4 per cent in 1976-77 was to be achieved.

That is the exact opposite of what this Government was trying to do or was wanting to do. According to the article, because this sort of claim or argument was similar to the policy advocated by the Government's critics, the Government insisted that it be removed from the final draft of the report. The Government is allowed to doctor the report. That is beaut! It is not in the report; so maybe we will not hear about it. But we do hear about it. The idiocy of that move is that the Government is fooling itself. It does not want to face realities; so it rubs out the uncomfortable evidence. The article continues: the OECD estimates that Australia will achieve a growth rate of only 3 per cent in 1976, and an estimated 3.2S per cent in 1977.

According to Davidson, if this forecast is correct -it is happening before our eyes right nowunemployment will continue to rise during 1977. He said that in December 1976. That is what is happening now. The article continues:

The view expressed privately by members of the OECD secretariat in Paris is that devaluation will provide only a temporary stimulus to domestic demand, and that this will be more than counterbalanced by loss of business confidence as a result of the acceleration in inflation which will set back the prospect of a stable recovery by at least a year.

So the whole problem grinds on and gets worse and worse. According to the article, we are looking for all sorts of straws in the wind to help us get out of our mess. We hope that our primary products will sell more easily, but the report suggests that the recent fall in food grain prices is not likely to be reversed in the very near future. We are told that commodity prices, particularly for minerals and metals, are likely to be soft. That is a gentle way of saying that they will be depressed or low, or that we will not get as much as we would like for them. Internationally traded meat prices, particularly for beef, are expected to remain depressed.

I am not quoting all this just to poke a finger at the Government. I said that I wanted to muse a little, and I do. The editorial in the Australian Financial Review of 4 March points out that the expected growth for last year has not been achieved anywhere. It looks as if it will be worse than expected. In fact it is worse than even the pessimists had forecast. That is the position in America and most other countries. The Mitsubishi Bank says that the economy of Japan seemingly headed up several times towards recovery but has run out of steam and even now is unable to set itself firmly on the road to recovery. I am simply quoting all this to suggest that there is something wrong in the basic logic behind the moves to control inflation. What we are really doing is simply maintaining a state of affairs in which we have massive unemployment, we still have inflation and we merrily pursue the same policies. I think it is time the Government had a very serious rethink. It is wrong in its present course.

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