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Tuesday, 15 October 1985
Page: 1242


Senator HILL(5.26) —The Senate is debating a number of tax Bills at the first reading stage. In part they implement the Government's Budget. This again gives us an opportunity to review the Government's economic performance. I think it is fair to say that since the Government came to office there has been an improvement in the country's economic performance. We recognised that earlier and I do so again. Economic growth is around the 4 to 5 per cent level and there has been some employment growth.

Yet despite the fanfare of trumpets and self-congratulations which this Government incorporates into every announcement of good economic news, the following should be remembered: The turnabout in economic activity has started from a very low base. The Hawke Government had at its disposal the beneficial effects of the previous Government's wage pause initiative, the breaking of the drought and the fortuitous turnaround in world economic activity. Even at growth rates of 4 and 5 per cent the economy will remain incapable of absorbing the unacceptably high levels of unemployment as long as the Government persists with its inflexible labour market policies. We are still uncompetitive internationally, with a strong likelihood that an expected rise in inflation will exacerbate our competitiveness problems. Although we hear from the Government about the importance of a strong and growing private sector, the Hawke Government remains a high taxing, big spending Government. In contradiction of the promises and assurances made by the Prime Minister (Mr Hawke) and the Treasurer (Mr Keating), real interest rates are the highest in 50 years and are continuing to rise.

The sad fact is that this Government has for some time believed its own rhetoric. It is ignoring the warning signals at its own peril. Nowhere is this more apparent than in the 1985-86 Budget. Despite the personal income tax reductions made effective from November 1984, pay as you earn tax collections are estimated to increase by 11.6 per cent this year. Three-quarters of a million Australians will pay more tax this year because of what is euphemistically called fiscal drag. This is one of the heavy costs we pay for full wage indexation enshrined in the sacred accord. Wage indexation, without tax indexation, provides a ready and painless source of revenue for the Hawke Government.

It is this ever-increasing hidden tax take which is helping to fund the reduction of the deficit to $4.9 billion, along with the one-off jump of a 20.8 per cent increase in non-taxation receipts generated by Reserve Bank of Australia foreign exchange earnings resulting from the depreciation of the Australian dollar. While the depreciation of the Australian dollar has brought a mild budgetary windfall, the Government remains incapable of addressing the issues which have led to the devaluation in the first place.

Australia's current account deficit in 1984-85 was $10.2 billion and, as we have observed from today's Press, the position continues to deteriorate. It is this continuing deterioration in Australia's current account which even the Minister for Trade (Mr Dawkins) has identified as a major area of concern. The impact of this trend on the value of the Australian dollar was identified on page 12 of Budget Statement No. 1 with the following rather bland comment:

External account developments and other factors contributed to a sharp depreciation of the $A in the second half of the year.

Of course, Treasury does not elaborate on the other factors which contributed to a depreciation of the Australian dollar against the United States dollar of some 17.9 per cent on a trade weighted index basis. But I would suggest that if one were to hazard an educated guess, the factors mentioned would have included the MX missile debacle of February 1985 and the Government's indifference to the necessity of seeking any immediate discounting from prospective wage indexation rises for the effects of devaluation. On both counts the international financial markets found this Government wanting and passed the appropriate judgment.

The consequences for the economy following from the depreciation are clearly set out in the Budget Papers. The Budget Statement on page 12 states:

The $A depreciation has important implications for growth and inflation prospects.

On the following page Treasury continues:

The challenge for policy is to ensure that these unavoidable rises in the price level are quarantined. Prospects for sustaining growth beyond 1985-86 will be seriously impaired to the extent that this is not the case. Wage and price determination processes have a critical role to play here.

In both areas, the prospects for both wages and prices during 1985-86 leave little cause for comfort.

With regard to prices, the consumer price index is to increase by 8 per cent through 1985-86 and in year average terms. Inflation is therefore on the rise again, while the Organisation for Economic Co-operation and Development average inflation rate is forecast to remain under 5 per cent for the remainder of the financial year. The competitiveness gap between Australia and our major OECD trading partners is therefore widening to our disadvantage.

Any competitive edge Australia may hope to obtain from the depreciation is under threat from wage increases which do not take account of the decline in the value of the dollar. The Treasurer, in his Budget Speech, made precisely this point when he warned:

If the initial and full price effects of the depreciation were to be transmitted to wages via indexation decisions, our cost increases would noticeably exceed those of our major competitors for years to come.

The Treasurer then announced the Government's attitude to wage discounting. He said:

That is why, temporarily, we must modify our normal support for full wage indexation.

He went on to say:

. . . in the next two wage indexation cases the Government will argue before the Full Bench of the Conciliation and Arbitration Commission that the price effects of depreciation be taken into account.

These are fine and sensible intentions which the Opposition had been urging on the Government back as early as May of this year. Yet the sense of relief which followed this statement temporarily blinded the business community to the implications of the statement which immediately followed when the Treasurer said:

Before the case begins, the Commonwealth will meet with Unions and with employers to discuss the Government's approach.

He continued:

Within the framework of the accord, we will explore with the ACTU means by which any temporary loss of real income can over time be fully restored without doing damage to the economy.

Of course, we now know what was the outcome of these discussions and explorations, principally with the ACTU.

In the face of implacable ACTU opposition, this Government will not now argue before the Full Bench that the price effects of depreciation be taken into account. Instead we have been presented with a Government-ACTU deal which delays any discounting for a full six months. Even then, not only will 2 per cent discount of a May wage rise be offset by a 2 per cent tax cut in September 1986, but also the full weight of the Federal Government will be put behind a 3 per cent productivity rise in the form of a two year phased-in occupational superannuation scheme. In one stroke the Government has succeeded in keeping the accord operational at the expense of long term business confidence, profitability and investment.

The Confederation of Australian Industry made clear what this deal means for the Australian economy when it said:

The failure of the Government to grasp the nettle now will have a severe effect on the economy and on overseas perceptions of Australia. The ACTU has once again exploited its privileged position and the Government, rather than acting in the best interests of the community, has succumbed to ACTU pressure in an attempt to keep the accord alive.

The tenuous presumption underlying this strategy-if it deserves to be called a strategy-is that the economy can in fact afford any productivity rises to be eaten up in higher business costs via occupational superannuation.

Some six months after the depreciation we still see no evidence of the fall in the dollar's value providing any significant economic stimulus. Despite the depreciation, increased demand is being met by imports rather than domestic production. All we have is the expectation and hope that the depreciation should provide a boost to both import competing and exporting industries. But what if this does not in fact eventuate, or the boost in domestic production and productivity does not achieve the level which the Government hopes will form the basis for the 3 per cent productivity pay rise in the form of phased-in occupational superannuation? At best the economy will, by the middle of next year, be facing a delayed wage discount and the added cost burden of occupational superannuation. The business sector will be confronted with an 8 per cent inflation rate compared with an OECD average inflation rate of 5 per cent. The ACTU-Government deal therefore merely condemns Australia to a further period of international non-competitiveness.

If anyone is in doubt as to what is at stake they need only to refer to the paper tabled by the Minister for Trade in the autumn parliamentary session which analysed Australia's past trade performance and future prospects. This document clearly identifies Australia's long term decline as a trading nation as a matter of serious concern. We note for example that over the past 30 years there has been a decline in the export gross domestic product ratio from 20 per cent to 13 per cent. What this means is that Australia's export sector has failed to provide an engine of growth for the economy. Yet, even in the 10 year period 1973-1983, 27 other economies have been able to increase their export GDP ratio. The paper contains other statistics.

We also see that the international purchasing power of Australia's exports has increased only slowly over the past three decades. In the 10 years from 1973 to 1983 the purchasing power of our exports in fact declined at an annual rate of 1.4 per cent. Yet for 18 other nations for which comparable data is available for the same period, all increased their international export earning power at a faster rate than Australia. In fact, in the decade to 1983 only three countries recorded diminishing international export purchasing power, all of which were slower rates of decline than Australia's. I also remind the Senate that in 1953 Australia ranked eighth in the ladder of trading nations. We had slipped to twelfth by 1973, and in 1983 we were down to twenty-third in ranking. So the statistics continue.

However, the most important decline in export market penetration has been in the western Pacific region, and this should be causing us particular concern. Declines have been experienced in Australia's export penetration into ASEAN and the People's Republic of China. The only bright spot has been the Republic of Korea. These statistics are well known but, I suggest, deserve repeating again and again because they emphasise the task that we face. The problem that we face now is the prospect that any chance we have to repair the poor trading performance of the past 30 years may well be frittered away by a government which finds itself incapable of adopting policies which address the fundamental structural problems of our international non-competitiveness.

History may judge that in regard to our declining trade performance we failed to recognise these factors early enough, perhaps because of our dominance in food and mineral commodities. We failed to see the importance of the realities of a dynamic world demand for processed and value-added manufactured goods. Where do we go from here? The 1980s and 1990s clearly hold the prospect of lost export and competitive opportunities because this Government cannot see beyond the domestic imperatives of the prices and incomes accord. This is a matter of great regret for this country because opportunities that have been presented to us have not been grasped, they have been let go. Those opportunities may not come again to this country for a very long time.