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Tuesday, 23 May 1989
Page: 2469


Senator SHORT(4.59) —The package of Appropriation and Supply Bills being debated by the Senate comes at a time of critical importance for the Australian economy. The future of the Australian economy is balanced on a knife-edge. Certainly the problems facing the Australian economy-when one looks at the fundamentals of the Australian economy-are as serious as they have been in the lifetime of most Australians today. If one looks at the basic statistics and fundamental situation underlying the economy, one has cause for the gravest concerns, not only regarding where we stand as a nation, but in particular regarding where we are heading in the period ahead. In my remarks today I would like to concentrate not only on those macro-economic issues, but also on some of the fundamental micro-economic issues and problems facing us. I shall reserve comment on specific aspects of the appropriations, which have been the subject of Estimates committee consideration, until the committee stage.

The Government has made some massive miscalculations over the past year as to the course of the Australian economy. It is unusual for a government to accept or admit that it has been wrong. Often it has to be left to officials of government to do that because, quite frankly, the government of the day does not have the intestinal fortitude to do so. We are very fortunate in having had, for several years, a Reserve Bank of Australia Governor in the person of Mr Bob Johnston, and I take this opportunity of paying him a great tribute in his role as Governor of the Reserve Bank. His term expires within the next few weeks. We have been privileged and very fortunate in having Bob Johnston as the Governor of the Reserve Bank. Last week, in an address to the National Farmers Federation annual conference, he said exactly how it is. He admitted, and he was doing it on behalf of the Government, that they got it wrong. I quote from what Mr Johnston said last week:

It was believed then (i.e. a year or so ago) that the course of monetary policy could be a good deal easier. Now . . . the major miscalculation that we made, including myself, was to underestimate the power in the economy, the pressure of growth, the exuberant spirit and the animal spirits that were at large and we have gone on underestimating for a very long time how strong the economy is-so that we were not able to get a switch of policies, pressure from monetary policy on to fiscal policy, and we find now that we need them both.

That, if I may say so, is what the members of the Opposition have been saying now for a year and more. We have told the Government time and time again that the Government was on the wrong course in terms of its economic policies. It is only now that the Government, through a senior person such as Mr Johnston, has been prepared to say that. We have seen the Government stay stubbornly on a course of economic policy that is leading Australia right down the road to the root of the banana republic which, only three years ago last week, the Treasurer (Mr Keating) said that we would go down if we did not get our policies right. On 16 May 1986, the Treasurer said:

If this Government doesn't get the adjustment . . . and a sensible economic policy, then Australia is basically done for. We will just end up being a third rate economy, a banana republic.

That is what the Treasurer said three years ago. He was predicating the future of the Australian economy on getting economic policy right. Over the past three years and earlier, the Treasurer has consistently got economic policy in this country wrong. One of the greatest, most skilful stunts in political history in this country has been the development of the myth that this Treasurer has been a good Treasurer. The economy, under the Hawke-Keating Government, has deteriorated in terms of its fundamental underpinning in a way that no one could have believed possible when this Government came to office in March 1983. Who could have believed in March 1983, with a level of external debt of the order of $30 billion, that in May 1989, six short years later, our external debt could have quadrupled to almost $120 billion? Who could possibly have believed that the job increases that the Government thrusts down our throats continually in terms of the number of jobs created in the Australian economy in recent years, if one looks at the increase in the external debt, have been at a cost of $70,000 per job? Who could possibly have anticipated that, despite a healthy world economy and despite commodity prices that have been at their best level in the postwar period, with the minor exception of the Korean War commodity boom, our balance of payments deficit in the first 10 months of this year would be in excess of $14 billion, with every prospect that that figure will increase certainly to between $16 and $17 billion by the end of June?

The present foreign debt situation and the balance of payments situation in Australia will create burdens and pressures on the Australian economy that will take decades to alleviate. We have been living as a nation way beyond our means. The rate of increase in spending in this country in the last 12 months or more has been twice the rate of increase in production. Yet the Government says that we are on course. It looks at the dollar falling like a stone. The dollar should have come down. We told the Government 12 months ago, when the Australian-United States dollar rate was in the 80s, that the fundamentals of the Australian economy were such that the Australian currency was overvalued. It has now come down and has therefore made exports more competitive but, on the other hand, has greatly increased the cost of imported goods and has increased the foreign debt burden. Despite that, despite all the evidence and despite the fact that money supply increase in Australia is running, depending on how one measures it, at 20 per cent or thereabouts, the Prime Minister (Mr Hawke) is reported in today's paper as having last night refused to change economic policy in any way at all.

One of the other great myths about the present state of the economic policy is the myth that in fact we have a tight monetary policy. That is a myth. The fact is, as I have said, that money supply growth is running at an enormous rate of increase, 20 per cent or more, and is continuing to increase. In fact, since 1983-84, it has been growing far too rapidly. There are various measures of money supply growth and it is a very complicated issue. Certainly there is no direct relationship between the growth in the money supply and other factors such as inflation, economic growth or investment. In the sense of a direct arithmetic relationship there is not, but there is a view widely held and widely shared by economic commentators, by Treasurers, by Reserve bankers and by anyone else who has studied economics at all that there is a relationship between money supply and the overall health of the economy. If money supply is greatly exceeding the rate of increase in productive capacity in the economy and the increase in production, there will be a potential inflationary situation which will inevitably spill over into an actual inflationary situation.

The current rhetoric that monetary policy in this country is tight is not supported by the facts. According to the various definitions and the so-called measures of money, the rates are running at excessive levels and have been for some considerable time. It is quite possible that the money supply situation has development a momentum of its own whereby there is little that the Reserve Bank can do to arrest that monetary explosion other than by trying to cool off economic activity. That practice tends to kill the economy first before it kills the money supply. What we have seen is an over-reliance on monetary policy, despite the fact that there has been an under-reliance. The problem is that the Government has not used fiscal policy, wages policy and exchange rate policy in any complementary way to produce a balanced set of economic policies. As a result, we are wildly out of kilter in this country. Despite the apparent reliance on monetary policy, there is every prospect of there being a problem for the future as a result of what is being stirred up and stored up.

I come back briefly to the problem of the balance of payments, which is horrendous. Senator Stone mentioned the figures earlier, as I have in my remarks. It is very salutary to look at the balance of payments and balance of trade figures over a period of years. I seek leave to have incorporated in Hansard a series of figures on the balance of merchandise trade and the balance on the current account for the period since 1984-85.

Leave granted.

The table read as follows-

Month

1984-85

1985-86

1986-87

1987-88

1988-89

Balance on Merchandise Trade (a)-$ million

July ...

-352

-524

-535

-396

-483

August ...

-341

-106

-403

17

-411

September ...

72

-187

-445

-224

-28

October ...

-254

-599

-592

-128

-633

November ...

-66

-262

-53

-157

-551

December ...

-110

-374

314

231

-10

January ...

-318

-57

-232

587

-481

February ...

35

-121

-75

-18

-225

March ...

141

-298

120

-143

-493

April ...

284

-531

-83

464

-117

May ...

-54

-265

122

-213

June ...

82

-144

126

131

Annual ...

-881

-3 468

-1 736

144

Balance on Current Account-$ million

July ...

-1 173

-1 480

-1 589

-1 365

-1 516

August ...

-1 090

-1 026

-1 225

-894

-1 394

September ...

-710

-1 110

-1 396

-1 262

-1 071

October ...

-1 203

-1 661

-1 757

-1 372

-1 777

November ...

-881

-1 026

-797

-900

-1 550

December ...

-904

-1 186

-456

-705

-1 056

January ...

-1 261

-1 168

-1 304

-553

-1 689

February ...

-658

-984

-972

-1 059

-1 169

March ...

-644

-1 180

-794

-1 277

-1 627

April ...

-623

-1 514

-1 142

-558

-1 191

May ...

-1 033

-1 304

-868

-1 370

June ...

-921

-1 170

-865

-1 005

Annual ...

-11 101

-14 809

-13 165

-12 327

(a) Excess of Exports of Merchandise over Imports of Merchandise.

Update: Mid June.

Source: Balance of Payments, ABS (5301.0.5302.0).


Senator SHORT —I thank the Senate. The Government has made numerous mistakes, particularly in terms of its forecasting. It has made horrendous mistakes in its balance of payments forecasting. This year it forecast a deficit of $9.5 billion. That is going to finish up at something closer to $17 billion. It has also made gross mistakes in forecasting the rate of inflation. At the time of the Budget last August, the Treasurer was saying that inflation was expected to slow substantially over the year to around 4.5 per cent. That figure is obviously way out. Even the fiddled inflation rate that the Government produced the other day shows an increase of just under 7 per cent during the 12 months ended in the recent March quarter. The real figure is somewhere between 7 per cent and 8 per cent, and there is every probability that the rate for the year ending June will be higher than that.

The Treasurer has got his inflation expectation or forecast wrong by not much short of 100 per cent. The consequences of that for the economy are only too plain to see. Of course, inflation has some benefits for the Government. It allows it to increase tax revenues through bracket creep. One of the other underlying problems that we have experienced in this country since the Hawke-Keating Government came to office is the fact that the overall level of taxation has risen and remains the highest in our history. That has been done through a series of measures. A whole raft of new taxes has been introduced. There has been a rip-off of taxpayers through the indexing of sales taxes and excises, which has caused a higher and higher proportion of the total income of the community to be sucked up in taxation revenue to the Government.

The interest rate structure is also of great concern and is something which the Government got absolutely wrong. It got it absolutely wrong because it wrongly read the signals as to the environment in which the Australian economy was operating. It also got it wrong because it was not prepared to tell the truth as to its expectation of interest rates. Only a few months ago the Prime Minister, when he was campaigning for the Western Australian election, said a few days before the poll that interest rates would fall during 1989. The actuality is that interest rates have risen, and they will almost certainly continue to rise. At least the Treasurer has now been forced to admit that there is every probability that interest rates will have to rise still further, yet only a month ago he was saying that they had peaked and that he was confident that they were on a downturn.

The increase in interest rates has had a staggering effect on living standards in this country, particularly those of young married couples with children seeking to buy or trying to pay off an average home. Nowadays, because of the increase in interest rates, according to research by the Housing Industry Association, families need to have an income of $52,300 simply to qualify for an average home loan. According to the relevant indexes, home loan affordability has fallen to its lowest level for five years or more. Mortgage repayments are now swallowing up to 40 per cent of average household incomes. A one per cent increase in interest rates is equivalent to something like a $40 per week repayment on an average mortgage. Housing interest rates have risen over the last 12 months from about 13 1/2 per cent to 16 or 16 1/2 per cent, and they will almost certainly go to 17 per cent in the very near future.

They are some of the fundamental problems that we are facing. They are essentially of the Government's own making. They have occurred despite the fact that things have been going well for us in the external environment. As I think Senator Stone mentioned in his address, what on earth is going to happen to our situation if there if a fall in commodity prices over the next 12 months? Commodity prices have been almost at their highest since the Second World War and have caused our balance of payments deficit to be several billion dollars less than it would otherwise have been. Had commodity prices not increased to the levels that they have over the last two years, our balance of payment deficit this year, which is going to be $16 billion to $17 billion, would almost certainly have been in excess of $20 billion. There are signs in the international economy, particularly in the United States of America, Japan and some of the European countries, that economic growth over the next 12 months is going to slow down. If that is the case there is every likelihood that commodity prices will ease back. Indeed, that has started to happen already. Over the last few weeks there has been a decline in many of the prices for metals and minerals. There has been an easing in the wool price and increasingly there is the view amongst economic analysts and commentators that we are in for a period of reduced commodity prices over the next 12 months. If that is the case, this will simply heighten the problems that we have with our balance of payments position and therefore, of course, our external debt position.

Australia has had a massive increase in imports, far exceeding our increase in exports. That is the essential reason why we have this continually deteriorating balance of payments situation. The Government does not seem to know even what the imports comprise. The Treasurer is running around trying to tell us that the growth in imports is essentially attributable to the import of investment goods which add to the productive capacity of the economy. But then we find Senator Button's Department of Industry, Technology and Commerce saying that it does not know how many computer goods are being imported to Australia. It simply does not know the value of computer imports; yet computer imports are, presumably, a very important element in the area of investment. If we look at the list of imports over the last two to three years we find that a very significant proportion of the increase appears to have been due to imports of consumption goods. It is no wonder that overseas investors are losing confidence in the Australian economy and that is evidenced all too clearly at the moment by the decline in the value of the Australian dollar.

The matter of the gravest concern to us all, of course, is: where do we go from here? We may be concerned about the past and what it means for the future, but the question is: what will we do in the future to alleviate the problems that are already stored up? Will we as a nation and the Government as an economic manager be able to respond? Will business be able to get us out of the dreadful mess and bind that we are in? My answer to that is that unless we as a nation change course very rapidly we will simply drift further into the mire. We are already slipping very dramatically in the world rankings in terms of our standards of living. In fact, we have witnessed absolute declines in our standards of living over the last couple of years and, in terms of our relativity with other nations, the decline is even greater.

We will not solve our problems unless government adopts a much more balanced set of economic policies and exhibits more courage in the tackling of those policies than we have witnessed over the last six years. That applies to both macro-economic and micro-economic policies. So far as macro-economic policies are concerned, the Government has not taken the knife to its own spending in the way that is essential if we are to trim the size of Federal government and thus the necessary tax take of the Government. That is essential if we are to give individuals more incentive to be more productive and more efficient and to work harder and, more importantly, be smarter. As our foreshadowed amendment to the second reading motion for Appropriation Bill (No. 3) says, the Government is to be condemned:

. . . for its failure to pursue policies which will address the twin evils of a dangerous level of foreign debt and declining living standards, leading to a . . . loss of control over the future of Australia.

It further notes, amongst other things, the lack of ability or willingness on the part of the Federal Government to cut its own spending while instead applying pressures on the spending of State governments that it is not prepared to apply to itself. There has to be a much tighter approach to fiscal policy if we are even to make a start on getting our macro-economic policies right.

We will also have to adopt a tighter monetary policy. The rate of growth of the money supply has to be slowed if we are to remove the excesses that will lead to an inflationary splurge sooner or later. In respect of wages policy, the Government will have to adopt the sort of approach that is embodied in the coalition's industrial relations policy which will lead to a freeing up of and greater flexibility in the wages system so that people can be rewarded more on the basis of productivity and efficiency and the resources of our economy can be used and can flow in the most efficient directions.

On top of that, we have to tackle the strangleholds on the economy that come from a variety of areas. In particular, we face enormous micro-economic problems in respect of the role of trade unions in our economy. We have the problems of rigidities in the shipping industry and on the waterfront-indeed, in the whole area of transport. We have to be much more flexible in our approach to the whole area of communications. The longer we delay tackling all those issues, the harder it will be to deal with them properly in the end.

Again, I commend to the Senate the amendment that was foreshadowed by Senator Stone to the second reading motion for Appropriation Bill (No. 3). That amendment reflects the very things that need to be done if we are to put Australia on the road to greater efficiency, productivity and, therefore, increased living standards. This involves dealing with a range of areas. Award restructuring needs to be geared to efficiency and productivity-it should not be a form of social welfare program as is often envisaged by the trade union movement. I am not attacking the trade union movement in this sense; what I am saying, though, is that if we are serious about recognising and tackling the problems we face, the areas of restructuring and wages and all the other micro-economic restraints and constraints we have on our performance must be tackled as a matter of urgency.