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Wednesday, 1 June 1960

Mr CAIRNS (Yarra) .- Towards the end of this discussion on the supplementary estimates the question has been put fairly clearly by the honorable member for Wentworth (Mr. Bury) as to what the Labour Party was doing about inflation, and at this late hour I would like to devote a little time to answering that question. In order to answer it, it is necessary to realize that the way in which any of us looks at the economy involves a certain kind of economic theory. The theory that the Government has accepted as its way of looking at the economy is what is known as the Keynesian theory. This came into fashion after December, 1935. Ever since then conservative people have thought of the economic system as an aggregate. They have adopted the aim of full employment; they have believed that if a sufficient level of demand can be maintained - sufficient to maintain full employment - the position is fairly satisfactory. This was a relatively new way of looking at the economy.

Involved in economic theories for a decade have been other ways and from time to time notable people have not been satisfied with this way of looking at the economy and have directed attention to what has been going on inside the economy. They have said it is not sufficient to be concerned with the aggregate income, but that you have to be concerned with the difference between the high income and the low income. They have said it is not sufficient to be concerned about whether all the resources have been employed or not, but that you have also to be concerned about what those resources are employed upon. They have said that you have to be satisfied that there is a fair distribution of income and that there is an allocation of resources which are suitable to meet certain social purposes and, of course, " social purposes " involves a particular point of view.

It should be apparent to the honorable member for Wentworth particularly that throughout this debate members on this side of the House have said that we are not satisfied that sufficient is being spent upon public works. We are not satisfied that sufficient is being spent on education, roads, public transport or social services. We say that there is undoubtedly a distortion and lopsidedness in the economy because not sufficient is being spent on these things. We say also that on the other side of the line too much has been spent upon certain kinds of private activity. Large private corporations, in particular, have been able to acquire a very large and increasing share of the national income and a considerable amount of that income has been reflected not in the actual distribution of income to shareholders through dividends but has been allowed to become an accretion inside the structure in the corporation concerned. This has led to two things: First, it has led to an astounding amount of capital appreciation. The Deputy Leader of the Opposition (Mr. Whitlam) gave a very fine analysis in that respect this evening, to which the honorable member for Mitchell (Mr. Wheeler), who should have had more sense, gave a very inadequate answer. My colleague gave figures which I will not repeat; but he cited company after company which had a capital appreciation of ten or twelve times. He mentioned astounding amounts of capital appreciation.

The honorable member for Mitchell said that land speculation and asset speculation are the result of inflation, but it is the other way round. Inflation is the result of speculation which has been made possible by the enormous appreciation of capital that has taken place in recent years. Inflation, as we know it, is the result of distortion of the economy because people who have plenty of money have had so much more during the term of office of this Government. They have had so much more money to spend up and down the country from Surfers Paradise to Western Australia. They have had money with which to extend their own capital structures and buildings in the capital cities and set up service stations at every street corner. The fact that they have had so much money to bid up the prices of land and build service stations is in Itself inflation. Inflation is the result of the distortion of the economy, and therefore the Labour Party has said so; and we have been saying it for seven or eight years that I know of. We were pointing out this distortion in the economy long before Kenneth Galbraith, the American economist, set a new fashion among economists in talking about the affluence society and describing as a fundamental defect of the wealthy society the fact that less and less essential needs are receiving attention. Thus television sets come before houses - in my electorate people fall through the roofs of houses while they are putting up television antennae - and motor cars come before roads. We know that the banks and big corporations have fine new buildings, while schools are depressing, dingy and dirty. The Labour Party was emphasizing these things long before the American economist became famous.

The honorable member for Wentworth has asked what the Labour Party would do about inflation. We say that if inflation is to be dealt with in this country the -economy must be put back into balance. It is not sufficient to think in terms of the aggregate and the total amount of effective demand, unconcerned with who has it or who spends it. It is not enough to think about the total resources being employed. You have to think of what those men and materials are employed on. We say that the Australian economy at the present time is distorted and unbalanced and that until that balance is restored we will have fundamentally the problem of inflation. Let me quote a few figures to indicate, first of all, the nature of the distortion; and then I will try to suggest the action that can be taken by a government that is genuinely concerned to cure inflation and to restore balance in the economy. Some of these figures have been given previously to-night. I will not talk about pensions, because we know the state of affairs there. We know case after case where servicemen who have given great service in two world wars have been turned down by the Repatriation Department which applies the letter of a technical interpretation strictly though it should never do so. We know that the cost of attention in hospitals has now risen to £3 or £4 per day, and we know the situation that faces many people in the community who are in those categories to-day, we know that in recent years wages and salaries have risen, in money terms. In 1951-52 they represented 50.2 per cent, of the gross national product and to-day represent only 49.2 per cent, of it - a fall of 1 per cent., or more than £60,000,000. If wage and salary earners now had the same share of the gross national product as they had nearly eight years ago they would have almost all that they would have got as a result of the increase of the basic wage which the Conciliation and Arbitration Commission was asked to award recently.

The next group we come to in considering the national income is that containing unincorporated businesses - the smaller business concerns. Like the share of the wageearners, their share of the gross national product has fallen. Those members of the Liberal Party, and their friends, who are associated with small businesses, are in the position of having a lower share of the gross national product, but, of course, for social and political reasons they identify themselves with the big fellows. The share of unincorporated businesses in the gross national product was 10.1 per cent, in 1951-52 and had fallen to 8.8 per cent, in 1958-59 - a fall of 1.3 per cent., which was a greater fall than the fall in the share of the wage and salary earners.

Now we come to the share of the national income of all companies, large and small, which increased in the same period from 9.8 per cent, to 10.2 per cent. - an increase of .4 per cent. The big fellows have about all of that increase. As I said a few moments ago, the most significant thing about companies now is not that their aggregate income has increased so much, but the amount that they have been able to keep back as reserves and in the form of capital appreciation. Depreciation allowances have risen from 3.8 per cent, in 1951-52 to 7.7 per cent. - an increase of 3.9 per cent. That represents more than £250,000,000 that companies have been able to hold back, largely thanks to the committee with which the Minister for Supply (Mr. Hulme) was associated. These companies to whom he gave such great service should keep him in luxury for the rest of his life.

The net rate of interest has risen from 3.7 per cent, to 5.2 per cent. - an increase of 1.5 per cent. So the pattern of income shows a rapid increase, since 1951-52, to property income receivers, and a fall to people who are not property income receivers. In addition to that, of course, there is tax avoidance. It is becoming increasingly the practice for managers and executives of companies of all sorts to have motor cars and petrol supplied by the company, to have holidays paid for by the company, entertainment expenses and many of their own personal expenses found by the company.

This change in the distribution of income, which we say is fundamental to the inflationary situation is a result of the fact that' wages have been frozen and have been subjected to very vigorous control, while profits have been free. In fact, the dynamic of inflation starts on the side where there is freedom - that is, on the side of private enterprise and big business. We were saying this for a long time. Then Dr. H.C: Coombs said it. When he said that monopoly elements in the economy were free to pass on wage increases, and were the originating forces of a state of inflation, people took a little bit more notice of this truth. But, as is true of most statements made by people who qualify as economists, this one was made many years behind the time when the same statement had already been made by the practical men.

The result of all these factors is, of course, that there is a vast accumulation of the current income in the hands of income receivers in proportion to the size of their incomes. When this point was made earlier on in the debate a number of members on the other side said, " What about dividends? Don't wage and salary earners receive dividends? Don't they receive their share of growing capital incomes? " Some of these people on the other side have been repeating this interrogative assertion for a long time.

Mr Uren - It is sheer fantasy.

Mr CAIRNS - It is a complete fantasy. I shall give evidence that will blow that assertion sky high. This evidence is in the 1956-1957 report of the Commissioner for Taxation, which is available to every one. Here is the position with regard to dividends: There were 2,099,272 persons who were not subject to provisional income tax in 1956-1957. They were substantially wage and salary earners. These people received no more than £1,643,988 in dividends, or less than £1 each in that year. These are the wage and salary earners who receive dividends! They received income from dividends which averaged less than £1 each in that year. Now let us look at the individuals who were subject to provisional tax - the property owners and the business people. In that same year there were 625,274 of them. People in that relatively small group received in dividends £97,178,661.

Mr Ian Allan - Now give us the insurance figures.

Mr CAIRNS - One would need to have an insurance policy to understand your point of view. Of that total of 635,274, only 224,801 actually received dividends. Not all the taxpayers subject to provisional tax received dividends. That meant that 224,801 people - the property owners - received in dividends £97,178,661, as against £1,643,988 - an average dividend of £1 each - received by the 2,099,272 persons who were substantially wage and salary earners. If one breaks up that number of 224,801 persons subject to provisional tax who received dividends, one finds that 109,117 of them received less than £99 a year in dividends, and 46,207 received less than £299, while 21,474 received less than £499. That means that in that year, in the whole of the Commonwealth, only 48,013 persons received more than £500 a year from dividends. That is how important dividends are to the ordinary member of the community!

Mr Uren - Is that people's capitalism?

Mr CAIRNS - Yes, people's capitalism. Of the total number of taxpayers, which was 2,724,496, only 48,013 received more than £500 a year from dividends. I have not worked out the percentage, but it is a very small one. We say that this unequal distribution of income - a situation which no Australian should be prepared to accept - has resulted in an unequal and unfair allocation of resources. Wherever the money is, men and the materials are drawn to serve that money. To-day, the money has gone over to the people who are well-to-do, and the resources have tended to do that also. So we get a distortion of activity in the private sector, as the honorable member for Chisholm (Sir Wilfrid Kent Hughes) recognized to-night. He recognized that there was a distortion between the private and the public sectors. What we have to face at this stage is how we are going to correct that distortion.

Do not let any one think for a moment, as the honorable member for Wentworth (Mr. Bury) seemed to think to-night, that this great acquisition of income by private people has resulted in a great uplift of investment. It has not done that at all, as I will show when I refer the House to the figures for private fixed capital equipment purchased during the year.

One might expect that this vast increase in income by investors - a capital appreciation which has never occurred in this country before - would mean that there would be a lot of new investment, that factories would be built and would increase in number in proportion to the gross national product. Let me tell the House what has happened in that respect. In 1958-59, gross private investment in fixed capital equipment was 17.2 per cent, of the gross national product. In the year before that, it was 17.6 per cent., and the year before that it was 16.5 per cent. In 1955-56, it was 17.6 per cent., and in 1954-55 it was 17.6 per cent. So, the amount of new investment has fallen, or has remained fairly stable, in its proportion to the gross national product during this time. In 1951-52, it was 18.9 per cent.

If the unequal distribution of wealth is to be justified, it should lead to more investment, but it has not done so. Instead of resulting in more new capital investment, which would raise the proportion of fixed capital equipment to the gross national product, it has resulted in speculation. The companies have not put their gains so much into new capital equipment as they have into land, which is not produced by any human effort. They have put their gains into existing assets, with the result that we have had a constant process of building up, and this is inflation. When the value of land rises, the value of the food produced on that land also rises and so the cost of living rises.

What are the wage-earners to do? Are they to suffer a decline in their actual living standards? No; they attempt to maintain their position in relation to the cost of living. At first, they begin to negotiate with the employers. Their wages are not increased automatically, in the way that the prices charged by employers are increased automatically. There has never been a more unfair and unbalanced state of affairs than that present in industrial bargaining. The workers' wages are controlled; the bosses' profits are free. If we cannot work out a better system of industrial arbitration than the one which provides this condition, the workers will not accept the position for very much longer.

Mr Whitlam - It is arbitrary.

Mr CAIRNS - Of course. We say that this inflation is the result of there being far too much money in the hands of the welltodo, who have not put that money into private investment so as to increase the amount of new capital equipment in the economy.

What has happened on the other side? We have not had an increase of private invest- ment. What has happened in public investment? The position is worse. The official figures show that the proportion of public works to the gross national product - this includes a number of items that are nonproductive - was 8.4 per cent, in 1958-59; 8.2 per cent, in 1957-58; 8 per cent, in 1956-57; 8.3 per cent, in 1955-56; 8.5 per cent, in 1954-55; 8.7 per cent, in 1953-54; 9.1 per cent, in 1952-53; and 10.2 per cent, in 1951-52. The record shows that we now have 2 per cent, less of the gross national product in public works than we had in 1951-52. That is £120,000,000 less. If the same proportion of the gross national product went into public works to-day, we would have a much better record in the provision of schools, hospitals and roads - the basic requirements of national development.

The inflated economy over which the Government has presided for ten years has not resulted in a greater proportion of the gross national product being used in public works. We have had a falling trend, with a reduction of 2 per cent, in the last ten years. Whether we look at the short-term effect of inflation - the speculation that has come from this unequal distribution of income - or whether we look at the long-term effect, as outlined by the honorable member for Werriwa in his speech to-night, the result is the same - a decline in productivity. Productivity depends on an increase in the proportion of capital equipment of the gross national product, and because this proportion is falling, we are losing in the long-term race.

What is the remedy? The remedy is certainly not for the Government to sit wringing its hands, as hopeless as a beetle on its back, which was a very apt expression used by the Leader of the Opposition (Mr. Calwell) in relation to the Treasurer (Mr. Harold Holt), who is, I understand, much more at home in the water than he is in the Treasury. The remedy is certainly not for the Government to express regret that it has not constitutional powers to deal with this matter, when really it is very pleased that it has not those powers. The Government is concerned only to stop wage increases; it is not concerned to do anything about the increase of profits and capital appreciation. It seems clear that if we are to deal effectively with inflation and if we are to get the kind of capital development that we need, particularly in the private sector, an attempt must be made to change the present flow of income.

The first step is to discover where income is going. The official statistics show that it is flowing increasingly into the hands of private enterprise and that private enterprise is not using it as it should be used. Instead of using it for increasing investment in new capital, private enterprise is using it for speculation, and we have the speculative boom that is called inflation. It would seem to me that several things must be done. First, the Government should review the position of tax avoidance and plug the hole which enables company managers and executives to live at high standards on incomes that are not subject to taxation. Secondly, the Government should review the position with depreciation and undo most of the things that the Hulme committee did. If a company can show that it has used a certain amount of its income for investment, it can be given tax remissions on that amount; but it should not be given tax remissions on an amount that it can hold back, irrespective of whether it uses it to replace capital equipment or not. If this were done, funds would be diverted from speculation into the provision of new capital equipment in the private sector.

The third need is for the Government to realize that more funds are needed in the public sector. I was very pleased to hear the honorable member for Chisholm underline this point to-night. More money is needed in the public sector of the economy. How do we get this money? We either borrow it or we raise it by taxation. In the present situation, it is impossible for the Government to compete with private borrowers. The Government, at best, can offer only 5 per cent, or 6 per cent., but private borrowers can offer fantastic rates of interest. As a result, loan funds, like other funds, are flowing at an increasing rate towards the private borrowers and away from public borrowing. In the circumstances, it is impossible for the Government to obtain a larger share of the total borrowing. It must turn, therefore, to taxation.

The official figures show the position with taxation. An increasing proportion of company income is not subject to taxation.

That part of it which is subject to taxation represented, in 1951-52, 3.9 per cent. of the gross national product; in 1952-53, 4 per cent.; and in 1958-59, only 3.6 per cent. Companies, large and prosperous though they have become, are providing a declining part of the gross national product. These companies, of course, can afford to pay a greater share towards public development. Much of their success depends on the public services upon which they draw and on the growth of the community around them. They depend upon the development of roads and the provision of electricity, gas, water and all the other services. Of course, they can afford to provide a greater proportion of the gross national product.

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