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Friday, 18 August 1989
Page: 430

Senator McMULLAN(2.26) —I must confess to feeling some apprehension at the thought of being given the task of speaking first for the Government after an eminent economic representative such as Senator Stone. I have read the report of the Reserve Bank of Australia and I did not see how Senator Stone would get 20 minutes worth of significant attack on Government policy. I thought: He must have found something that I have not seen. There must be some hidden, profound, economic meaning that my mere Bachelor of Economics degree that I obtained years ago from the University of Western Australia did not gear me up to find. After listening to his 20-minute speech, I am relieved to find that that was not the case. Senator Stone, with his significant economic knowledge, which I accept, found no new, profound, hidden meanings. It was simply a question of selective quotation and enthusiastic interpretation.

I want to say a number of things about the report of the Reserve Bank, things with which I agree strongly, some comments on its interpretation, and some comments on the general economic situation. I want to make some points about Senator Stone's contribution. He quoted from a large part of page 7 of the report but he kept missing sentences that did not fit the thesis he wanted to put forward. For example, he talked about the extent to which monetary policy had played a role as a major instrument of Government economic policy in the last period, but he did not quote this bit on page 7:

Excess demand and its prospective spin-off to inflation made that--

that is, the role of monetary policy-

inevitable . . .

That bit just did not get mentioned because it did not fit his thesis. He quoted most of a paragraph-quite correctly, and I have no disagreement with it--

Senator Alston —It did not say `only monetary policy'.

Senator McMULLAN —It is not only monetary policy. Anybody who knows anything about economics-which does not include Senator Alston-would know that. Senator Stone correctly quoted:

On its own, monetary policy will not produce the longer-term structural benefits Australia is seeking.

Nobody should argue that it did; I do not and the Government does not. Senator Stone quoted the next sentence but failed to quote this part:

Nevertheless, monetary policy has an essential role in supporting structural reform.

It did not fit his thesis so he did not mention it.

Senator Stone —Supporting it is one thing. If it were the only thing happening it would be quite different.

Senator McMULLAN —If it were the only thing happening it would be quite different. But this sort of selective quoting does not suit Senator Stone. Honourable senators opposite have this one-dimensional theory and they tailor the facts to suit it.

Senator Stone subsequently quoted from a section on page 13 of the report. Economics is a wonderful study. I was about to say `science' but I think we all agree that that would be promoting it beyond its due standing. Senator Stone and Senator Button both quoted exactly the same paragraph to support their arguments. I was also going to quote-and I will do so-the paragraph on page 13 which Senator Stone quoted as some crushing indictment of the Government's policy. Those of us on the Government side who have read it and agree with it think it is a substantial, sensible contribution to an analysis of the economic situation. I will come back to that matter later. I simply refer to it to say that economics is a great discipline and perhaps a fine art. We can all interpret it differently, and that is essentially the point with which we are confronted today.

It is very interesting to note that this is the first occasion since the Budget on which the Opposition here in the Senate has sought to debate economic policy. Even now, those opposite do not want to talk about the Budget. After last night's speech by the Leader of the Opposition, Mr Peacock, it is very easy to understand why. As Michelle Grattan said in the Age this morning, it said almost nothing new; it has got nothing to say. That is why it is saying nothing. There is a discreet silence. Where was the great savings scheme last night? I suspect that it has gone back to Brazil, where it belongs and where, to his credit, Senator Stone consigned it fairly effectively on the day of its birth. He was absolutely correct. I enjoyed hearing him say it then and he is probably quietly enjoying having the rest of Australia, except for the Leader of the Opposition, confirm his correct assessment.

There were no details of the policy that the Opposition is hoping to put forward some time between now and the election. If I might divert for one minute of my valuable time to give a piece of gratuitous political advice, from my experience in these matters, I say to the Leader of the Opposition: `Do not carry on with all this dodging, evading and trying to be like the Teflon man with no policies sticking to you at all'. That might have been all right in the 1960s and 1970s, but it is not appropriate in the 1980s. The public will not cop it. It is old tactics in a new era, or what Paul Keating would call old politics.

Senator Stone —I agree, and that is why you are going to lose the next election.

Senator McMULLAN —I will come to that. I would be delighted to discuss that. He should heed the very good advice from Senator Stone and that which is quite evident from Dr Hewson's enthusiasm and release the policies and stop hiding behind this 1960s-style politics.

I turn to the question of the substance of the Reserve Bank's position and the arguments that have been put forward by Senator Stone to interpret it. The Reserve Bank correctly says in its annual report on page 13-and it is a quote that both Senator Stone and Senator Button have used today:

Retention of the present stance of policy should produce more significant restraint of spending as 1989-90 progresses.

I will not quote the rest of that paragraph, to save time, but I acknowledge the remainder of that paragraph and the proper reservations that are put in there by the Reserve Bank, with which I agree.

Senator Stone —And I agree with that sentence.

Senator McMULLAN —Yes, and I agree with the other two. As far as I know, everybody does. What it is saying, quite correctly, is that this is an important but necessary instrument for slowing spending with no guarantees of success. I have never heard of an economic weapon that had a guarantee of success. There is an element of risk in every economic policy decision, because the statistical base is always a bit out of date, the responses are never exactly as one predicts and, of course, exogenous variables always come in to knock the best theory. Ceteris paribus is the great excuse of all economists: if only all other things had been equal, my thesis would undoubtedly have been correct, but some external factor came in, as they always and inevitably will.

To put the worth of the Reserve Bank's assessment into perspective, when the Reserve Bank makes its prognostications for this year-and I am certainly not disparaging of the Reserve Bank, which is a very fine institution-it also acknowledges that it was wrong last year. It says on pages 11 and 12 that it substantially got it wrong, as did everybody else. It is not to be condemned for that, but it certainly means that it cannot be taken as gospel this year. It may be right; everybody else might be wrong. But it may also be as wrong this year as it was last year. For example, like everybody else, it underestimated the impact of the 1987 fall in share prices. I will not follow my colleague Senator Walsh and quote some other people's problems with that because had I been asked to quote-fortunately, in the position I then held I never was-I would have got it wrong too. Everybody that I know did. It led to some monetary policy problems, because that was the way we all thought we should appropriately respond to what seemed to be an impending crisis. The bank is saying that we are going in the right direction but that it is not risk free.

The Reserve Bank is saying-Senator Stone also quoted this, and I agree-that monetary policy cannot do all the job. If anybody thought that any one lever could do all the job, he would be quite profoundly wrong. There are times when there is only one lever that can do the extra bit that needs to be done. There is a need, in a situation where one wants to restrain demand and achieve a soft landing, for very tight fiscal policy. I would not have thought that a $9.1 billion surplus was too bad as a statement of tight fiscal policy. It is the biggest surplus in monetary terms-of course, that is not so meaningful; but it is the biggest surplus ever as a percentage of gross domestic product. That is a pretty good indicator not only that monetary policy is working but also that the Government is running a very tight fiscal policy. On wages policy, there has been a long period of effective wage restraint in Australia. If one wrote an economics text book, and I wrote an article myself to this effect--

Senator McGauran —Who do you think you are convincing?

Senator McMULLAN —All those who can get things through their thick heads; but I would not bother to talk to the honourable senator. Wages policy makes it very clear. I wrote an article to the effect that, if one could in some equitable and magical way achieve zero wages growth and wages outcome, it would have some beneficial economic consequences.

Senator Stone —That is just in line with what productivity growth would do.

Senator McMULLAN —If one could get what is the implication of Senator Stone's interjection, which is in the last year about a one per cent increase, that would have had some beneficial economic outcomes. So would zero inflation, or 6 per cent growth, or whatever one wants to achieve. It is easy just to pluck out a figure and say, `If I can only achieve X, things would be better'. Anybody can do that: economics, first year, Paul Samuelson. If one got it out and read it, it would tell one all those things. But it does not say how one is going to achieve it. There is no magic wand, no quick fix. That is the one thing that the Reserve Bank is telling us, to which the Opposition is not listening.

The report states that interest rates will not achieve a structural boom. On page 6, it states, quite correctly, that much of the investment which is going on in the investment boom is contributing to future productive capacity. The phrase `much of the investment' has been disparaged. It is true that some of it is not. The only way one can avoid that is to have some sort of regulation about where people can invest, which is not the way the Government or the Opposition, quite correctly, choose to go. I do not say that the Opposition does that, but people will always make bad investment decisions. Some people will make sensible investment decisions which are in their own interests but not in the national interest. That is always the case in a free market economy. There is no way that that can be avoided. But much of it is going to contribute to future productive capacity.

I divert briefly to the significance of the public-private composition of debt. I am delighted to hear what Senator Stone has said. I have always thought that it was his view that private sector borrowing and investment was inherently more efficient than public and that, therefore, there was great significance in this composition of public and private sector debt internally within Australia. I have always understood that to be his thesis. I have heard him argue it. I do not necessarily share it. If the logic of that position is followed, it means that the likely outcome of creating extra growth to meet the interest demands on private debt would be more substantial than the growth generated by public debt borrowing, which may not generate such substantial returns. I would have thought that that was the logic of his position, although not necessarily of mine. The significance of the distinction is to contrast the situation in Australia, where the substantial body of the debt is borrowing for investment-we have already had the discussion about the appropriateness of some of that investment-against the situation in some Latin American countries where the borrowing has been for recurrent government spending, which generates no new capacity to repay that debt. I do not dispute at all what the Reserve Bank says-that whoever borrows the money still has to pay it back and that it is a draw on the economy. I would not challenge that and I do not know of anybody who does.

Senator Stone —Today we are borrowing to pay the interest on past borrowings.

Senator McMULLAN —There is no doubt that, whoever borrows the money, the resources of the economy as a whole have to be used to repay it. That is an obvious point, and I do not argue it; as far as I know, nobody does. If the Reserve Bank wants to make that point, it is allowed to.

The Reserve Bank says some other important things that do not seem to have been mentioned by the Opposition, although I am happy to say that the independent commentators have. The figures have been substantially interpreted in the financial media-I think correctly-as showing that the Government can expect to achieve a soft landing. There is hidden in that an interesting comment on inflation prospects. The commentators have said that the unsustainable surprisingly high rate of demand has meant that the higher value of the dollar that we had, and to some extent still have, did not translate into lower prices for imports because there was no competitive pressure to force down the prices.

As an aside, let me say that I am pleased that the Prices Surveillance Authority is looking at that question; however, that is not the point I am trying to make. Logically what this leads to is that when the demand falls, as it will-and there is no dispute about that either between the Reserve Bank of Australia and the Government or between the Government and the Opposition-the preconditions will exist for a greater fall in prices than might otherwise be expected because of a fall that has been artificially restrained by the demand situation.

Senator Stone —But the Government has forecast that.

Senator McMULLAN —One element in the Reserve Bank report gives more cause for optimism about inflation than the official projections. That gives me some confidence. I expect inflation to fall through the year. I, like everybody else, wish it would fall further but I expect it to fall.

Senator McGauran —By how much?

Senator McMULLAN —Ha, ha! People pay me a lot of money for those sorts of predictions. I would like to take the last five minutes of my allocated time to talk in a positive way about some of the elements of the Budget and relate them to many elements of the Reserve Bank report. A substantial economic statement has been made since the Reserve Bank report was written. I am not arguing that the bank did not know those factors. That is a separate question about which I accept Senator Stone's experience. He has been on the Board of the Reserve Bank and I have not. Nevertheless this has happened since the report was written. Some other figures have come out which I suspect the Reserve Bank could not have incorporated, although I do not have first hand experience. I instance the latest national account figures, which I suspect the bank would not have had. Those figures are significant in terms of analysis of what the Reserve Bank has said.

Some of the strategy of the Budget is not directly relevant to the Reserve Bank so I will deal with that part only briefly before coming back to the more relevant bits. The Budget strategy has been to protect some of the very successful social and employment gains of the last six years. Although I could relate it to the Reserve Bank report, it is on a bit of a tangent so I will not pursue it. I merely put it on the record that the strategy deals with the question of a soft landing, the need to slow the economy to a sustainable level of growth to help deal with the balance of payments situation. I want to return to that point.

Senator Stone —A sustainable level of stagflation.

Senator McMULLAN —I do not expect and I do not think that at the moment the indications are that it will be as disastrous as that. I know there are some people predicting recession. Senator Stone and Dr Hewson keep doing it.

Senator Stone —Senator Walsh referred to the danger of overkill.

Senator McMULLAN —There is no doubt that everybody is apprehensive and that monetary policy is a blunt instrument. But all the options create similar challenges. I want to talk about the Budget and interest rates in relation to what the Reserve Bank has said. In this instance I welcome the fact that the Leader of the Opposition last night correctly acknowledged that there is no easy solution to the question of interest rates and accepts, by implication, the statement of the Reserve Bank that, irrespective of which government is in power, interest rates will stay high for quite some time to come. What `quite some time to come' means-three months, six months or nine months-nobody is prepared to say. The Reserve Bank is not saying, Mr Peacock is not saying-nor should he, I would have thought-and I am not saying. But there is substantial pressure to keep interest rates high. The Government's position is that they will not fall until the economic indicators show that the underlying economic circumstances warrant that.

The Reserve Bank is quite correctly saying, as are the Prime Minister (Mr Hawke) and the Treasurer (Mr Keating), that the signs are mixed and asking whether the slowing is sufficient. Since the Reserve Bank report has come down, in a way that the bank could not conceivably have known, we have now had the June quarter national accounts showing that gross national expenditure grew by only 0.6 per cent in that quarter and that, after three-quarters of import volume growth in excess of 8 per cent, imports grew by only 1.2 per cent. Those are new elements in the equation. They do not settle the question finally but they tilt the balance in favour of saying, `We are getting the slowing down that is required at the rate for which we were hoping'. There are significant underlying reasons to suspect that demand will slow and create a substantial reduction in imports and a potential for increase in exports and it will deal with the balance of payments problems in the way in which the Government had hoped: that is, to achieve the soft landing, the slowing down, without a recession, which is what distinguishes the Government from the Opposition. That is the difference in approach. The figures are starting to exhibit the prospect of success in that approach. That explains why the Australian people have re-elected this Government twice and why I am confident they will do so again next year.