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Thursday, 29 November 1973
Page: 4086

Mr WILLIS (Gellibrand) , when referring to the previous Government's economic policies, described them as: 'Sound, progressive, economic and financial policies and sound economic management'. In his Budget speech earlier this year, the Leader of the Opposition (Mr Snedden) said:

The choice the Australian people have to make is between the economic irresponsibility of the Government and the sound economic management we offer.

An objective analysis of the previous Government's economic policies and those postulated now by the Opposition shows those policies to be anything but sound. At some other time I shall expose the absurdity of the Opposition's current economic policies but today 1 want to demonstrate that in its last few years of office the previous Government was utterly irresponsible- - to use another of its favourite words - and left this Government a legacy of grossly excessive liquidity in the economy which accounts for both the present level of inflation and the tight money policy that this Government has had no option but to adopt. The irony of it is that the Opposition now berates the Government for the existence of conditions which are directly attributable to its own reckless disregard for proper economic management during its last few years of office.

The fact is that over the past few years the rate of inflation in Australia rose markedly. A table incorporated in Hansard by the Leader of the Opposition (Mr Snedden) on 28 March shows that from 1964-65 to 1969-70 the rate of inflation was between 2.6 per cent and 3.7 per cent per annum. Then it rose to 4.8 per cent in 1970-71 and 6.6 per cent in 1971-72. In 1972-73 it was held somewhat and dropped to 6 per cent. The previous Government absolved itself of all responsibility for the increase in the rate of inflation in those years and blamed the unions for seeking excessive wage increases, and the Commonwealth Conciliation and Arbitration Commission and employers for granting them. The Opposition ignored the fact that inflation had spurted upwards in most other countries in the world and denied that international fac tors were in any way an important reason for that upsurge in Australia's rate of inflation.

The previous Government sought to overcome inflation by appearing before the Arbitration Commission in case after case to oppose wage rises and also by introducing tough budgetary measures such as we saw in 1971, which led to a dramatic increase in the number of persons unemployed. In August 1971 the number of persons registered as unemployed was 76,000, seasonally adjusted, but in August 1972, only one year later, the figure had shot up to an unprecedented 120,000. Economic growth also suffered as a result of the previous Government's measures. Although the former Government did succeed in cutting back inflation somewhat by its measures, which are quite unacceptable to the present Government, it was at the same time sowing the seeds of much greater inflation in the near future. This stemmed from the former Government's utter refusal or inability to see that much of Australia's recent inflation was imported and that in those circumstances it was utterly absurd not to revalue the currency, particularly as our international reserves were large and growing rapidly.

The theory of imported inflation is one which was first postulated 2 years ago by Professor Harry Johnson of international fame. Professor Johnson maintained that the increase in world inflation during the late 1960s was due directly to the substantial increase in inflation in the United States of America which in turn was due to that country's deficit financing of the Vietnam war. The resultant upsurge of inflation in the world's largest economy had been transmitted overseas by way of direct price effects and a balance of payments deficit which flooded the world with United States dollars. I do not have time to explain this in detail but suffice to say that it has been increasingly accepted by economists overseas and in Australia.

In a speech in this House on 16 May last I referred to various notable overseas economists who had endorsed the Johnson thesis. Since then it has been endorsed by other economists in an Australian context, notably Peter Johnson of the Reserve Bank, who produced an article earlier this year which made this point, Professor Galbraith, a distinguished American economist who came to Australia a couple of months ago, Professor Michael Parkin of the University of Manchester and currently a research economist with the Reserve Bank, and Dr Michael Porter from the International Monetary Fund, and also the Reserve Bank this year. All these people have endorsed the Johnson thesis. Despite the fact that the Leader of the Opposition has achieved international notoriety by describing, during a debate earlier this year, Professor Johnson as a discredited American academic it seems more than likely that imported inflation has been an important factor in accounting for the higher rate of inflation Australia has experienced in recent years. The previous Government, by refusing to acknowledge this factor, pursued needlessly restrictive budgetary policies and left Australia completely exposed to that overseas inflation by refusing to revalue the currency. Thus Australia bore the full brunt of increased import prices which encouraged local prices to rise. As Dr Porter has shown, we were left also with an uncontrolled speculative capital inflow which greatly inflated the money supply and thereby sowed the seeds of further inflation which we are now experiencing. At the winter school of the Economic Society in Sydney on 9 November last, Dr Porter made some comments on Professor Argy's paper on world inflation. Referring to exchange rate policy Dr Porter said:

A rigid exchange rate tends to guarantee that a country shares in the broad trend of world prices. Countries may resist such trends by steady revaluation combined with a degree of monetary, restraint. Attempting to resist world inflationary trends without revaluation causes the domestic currency to become over-valued and this then generates speculative inflow. The resulting increase in liquidity ultimately aggravates domestic inflation. . . .

That exactly describes what happened in Australia last year and the year before. If we look at the balance of payments and the state of international reserves we find that in the past couple of years there was tremendous inflow into this country. In 1969-70 it was $798m; in 1970-71 it was $l,469m; in 1971- 72 it was $l,858m; and in the last 6 months of last year it was $996m. Much of this capital inflow was speculative and some of it was induced by the higher interest rates applying in Australia as compared with those available overseas.

Dr Porterhas produced a paper to be published in the 'Economic Record' entitled The Interdependence of Monetary Policy and Capital Inflows in Australia'. In this paper he explains that the previous Government's refusal to revalue the currency led to specula tive inflow which in turn expanded the money supply, and the Government's attempts to offset that increased liquidity by using monetary policy, that is, by selling government bonds to soak up money, meant that interest rates remained high and so induced further capital inflow. This in turn swelled our reserves even further so speculators brought in more overseas money as they sensed a revaluation. The Government attempted to offset this by further sales of government bonds. That kept interest rates high and so more capital was induced into the country. In this way our international reserves swelled even further and more speculative capital flowed in. And so the process continued.

The former Government's stubborn - indeed one might say idiotic - refusal to revalue was leading to a quite uncontrolled explosion of capital inflow, our international reserves and the money supply. I have referred to the figures of capital inflow. An even more dramatic picture is shown in the movement of our official reserves. In June 1970 they were $l,538m; in June 1971 they were $2,280m; in June 1972 they were $3,764m; and then, in November 1972, only 5 months later, they were $4,73 8m, an incredible increase of $974m. In December 1972 the official reserves were $4,8 16m; in January 1973 they were $4,849m and in September 1973 they had fallen to $4,090m.

It can be seen that in the last few months of office of the previous Government the economic policy was not sound at all. In fact, it was totally out of control. Overseas capital was flooding into the country. Overseas reserves were increasing at an unprecedented rate. Consequently the money supply was going crazy. In 1968-69 the money supply increased by 9.1 per cent; in 1969-70 it increased by 6.2 per cent; in 1970-71 it increased by 6.8 per cent; in 1971-72 it increased by 10.5 per cent and in the first 6 months of 1972-73 it increased by 16.7 per cent. By allowing the money supply to increase at such an extraordinary rate last year the previous Government was building up an inflationary time bomb set to go off this year. Economists differ as to the degree of importance to be attached to increases in the money supply but all agree that it is quite inflationary to allow the money supply to increase at a rapid rate.

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