ADDRESS TO THE

COMMITTEE FOR THE ECONOMIC DEVELOPMENT OF AUSTRALIA (CEDA)

SYDNEY

28 JANUARY 1998

Over the 1980s, Australias underlying inflation rate averaged around

8%. Australia was seen as in inflation-risk zone. Long term interest

rates carried an inflation premium. As growth picked up so too did

inflation. And the inevitable monetary response meant we couldnt

sustain strong growth. In late 1989 business indicator interest rates

were 20.5%.

This mornings CPI figures show that in the year to the December quarter

1997, underlying inflation was only 1.4 per cent. Headline inflation

was minus 0.2 per cent. These outcomes are low by historical standards.

Australias inflation performance now ranks as one of the worlds

best. We do not pay a significant inflation premium on long term interest

rates. Business indicator rates are now 8.45%. Housing mortgage rates

are the lowest in 30 years. And GDP growth is one of the strongest

in the developed world. Notwithstanding a financial crisis in our

region of proportions we have never seen before.

Our Government is committed to low inflation because it assists businesses

to make sound investment decisions and underpins the creation of new

and lasting jobs. Low and steady inflation gives savers and investors

the confidence to take long-term decisions and provides clear signals

on the best allocation of resources. Low inflation provides the underpinning

for the strong, sustained growth required to make lasting inroads

into unemployment.

But more than that. Recent currency movements amongst our trading

partners and in our own currency will put pressure on our current

account. This time we face those pressures in a fundamentally improved

environment.

The difference is that we have low inflation. And we havent been

here for 30 years.

Labor can take credit for low inflation. It was induced by recession,

by an 11.3% unemployment rate, by massive small business failure,

lost production and negative growth. What a cost. But Labor could

not run a low inflation growth economy. That took a new monetary policy:

the historic agreement between the Government and the Reserve Bank

of Australia to set an inflation target and entrench the independence

of the Bank. And that took a budget repair job to drive the budget

back to balance without tax rises.

The Government has kept inflation low without recourse to higher interest

rates. Labor was never able to achieve anything like that.

Australias low inflation record is set to be maintained, with the

expectation that over the next 18 months it will remain within the

Reserve Banks target range. This good inflation performance has been

gradually reflected in consumer inflation expectations. Setting aside

some recent volatility, inflation expectations are clearly on an improving

trend, a development which can help to maintain low inflation to the

extent that lower expectations result in wage claims more in line

with productivity improvements.

The low inflation Australia is experiencing is not accidental. It

is a direct result of our policies which have also enabled us to weather

the financial instability in much better shape than other economies

in the region.

Our sound economic fundamentals are underpinned by our efforts to

repay debt and balance the budget.

This has been recognised internationally, with the OECD providing

a strong endorsement of the Governments policy framework in its survey

of Australia released before Christmas.

Fiscal reform is necessary to raise national saving, reduce upward

pressure on the current account deficit, and therefore sustain economic

growth over the medium term. As the OECD pointed out, recent developments

in world financial markets have underlined the importance of these

measures.

The key objective of the Governments strategy to repair the Budget

position is to achieve underlying balance, on average, over the course

of the economic cycle.

Consistent with this, in the shorter term, the Government is aiming

to achieve an underlying budget surplus during our first term, that

is by 1998-99. It is also seeking to achieve significant surpluses

beyond 1998-99 while solid economic growth continues.

Moreover, the Government is aiming to reduce the Commonwealths general

government net debt to GDP ratio from just under 20 per cent in 1995-96

to 10 per cent by 2000-01.

The Government has a commitment to do this without increasing existing

tax rates or introducing new taxes in its first term while ensuring

all taxpayers pay their fair share of tax. The aim is to avoid an

undue tax burden on the community, while maintaining the integrity

of the tax system.

In this context, the Governments budget repair has focussed primarily

on spending restraint.

This reflects the Governments view that expenditure control holds

the key to achieving sustainable improvements in the fiscal position

and that scope has existed for rationalising programs and making government

more efficient.

The Government is therefore aiming to continue reducing outlays as

a share of GDP through to the turn of the century.

The latest Government estimates in the 1997-98 Mid-Year Economic and

Fiscal Outlook indicate that we are on track to achieve the Governments

fiscal objectives.

The budget is expected to have an underlying surplus of around 0.4

per cent of GDP in 1998-99.

This contrasts with the underlying deficit of around 2.1 per cent

of GDP inherited by this Government. Not only that but Labor policy

was to produce deficits as far as the forward estimates could see

– right into the next century. And what is more they fought us every

inch on our plan to balance the budget.

The IMF program to stabilise economic conditions in Thailand, Indonesia

and Korea requires those countries to produce fiscal surpluses. Under

a Labor fiscal policy we couldnt have matched that. Australia would

have stood out, in South East Asia, as being in the worst fiscal position.

Where would that have left us?

By the year 2000-01, underlying outlays are expected to fall to 23.3

per cent of GDP. This will be their lowest level in over 25 years.

Revenues are expected to be broadly stable as a share of GDP.

Along with the actual tightening of fiscal policy which has occurred,

further reforms have been introduced aimed at improving the conduct

of fiscal policy.

These include the introduction of the Charter of Budget Honesty, substantially

increasing the transparency and accountability in government through

improved disclosure of fiscal policy intentions and information on

fiscal developments.

In addition, the Government has announced that it will introduce an

integrated accrual accounting and budgeting framework for the Commonwealth

and all agencies by 1999-2000.

This will provide a better understanding of the full costs of policies

and their economic impact, which in turn should promote better budget

decision making.

Recognising that the financial system is the lifeblood of the economy,

the financial sector in Australia has also been a target of reform.

The Government has announced a package of measures directed at the

fundamental goals of increasing competition and improving efficiency,

while at the same time preserving the integrity, security and fairness

of the financial system.

In particular, the measures proposed will better focus regulation

according to its underlying objectives and ensure that it applies

in a competitively neutral way across the newly emerging market structures.

They will also promote greater competition, and through it the achievement

of greater efficiency, across the spectrum of financial and payments

services.

The key elements of the reform package are a new organisational framework

for the regulation of the financial system and a variety of measures

to improve efficiency and contestability in financial markets and

the payments system.

Following these and other reforms to corporate regulation, Australia

will have a world class regulatory structure that ensures the highest

standards of prudence and safety, and consumer protection.

The OECD recently described these reforms as a path breaking response

to recent and prospective developments in the financial sector.

Increasing efficiency and competitiveness of the financial sector

resulting from these reforms will enhance Australias attractiveness

as a regional financial centre.

Taken together, the Governments reforms have supported the economy

during the current turbulence in Asia.

The reason we pursue economic reforms, and the reason we have become

closely involved in international efforts to restore stability to

Asian economies, is that Australian jobs depend on a growing economy.

And growth in Asian export markets is good for Australian jobs.

Foir many years Australias trade and investment has benefited from

the strong economic growth recorded in most of the Asian economies.

Similarly, Australia will be adversely affected by the recent financial

turbulence and the significant deterioration in the short-term outlook

for a number of the economies in the region.

The mid-year forecasts incorporated a significant downward adjustment

to the international economic outlook to reflect the consequences

of developments in Asia. But it was recognised circumstances in Asia

were still evolving, and that the full ramifications of these developments

will take some time to become apparent. The outlook is particularly

uncertain and it would be foolish to predict the precise outcome.

We have taken care not to overreact to volatile developments. We take

a sensible and sober assessment.

As you are aware, a number of countries in Asia requested assistance

from the International Monetary Fund (IMF) in the second half of 1997.

The IMF, with the strong support of the World Bank, Asian Development

Bank and countries in the region, has implemented major economic stabilisation

and adjustment programs in Thailand, Indonesia and South Korea. The

latter programs were supported first by the United States and then

Europe.

Australias involvement in these programs has been swift and active.

Japan and Australia are the only countries involved in all three programs.

In the case of Thailand, Australias Reserve Bank has provided a swap

to the bank of Thailand for $US1 billion, of which around $US600 million

has been disbursed.

Australia has also pledged up to $US1 billion for Indonesia and South

Korea. These pledges are based on the Manila framework that was endorsed

by Ministers at the APEC meetings in Vancouver last November.

Any assistance provided as part of IMF packages is in the form of

swaps or loans. They are not grants. Money advanced will be repaid

in full once the programs have been completed.

We have not yet been called on to contribute to the IMF package for

Indonesia. We have signalled a willingness to assist if needed.

On 25 December 1997, I announced, along with the other supporters

of the Korean package, that a third of the bilateral financing will

be activated early in 1998. In Australias case, we will be activating

around $US330 million of our $US1 billion pledge. Our assistance will

be by way of a loan.

Although macroeconomic stabilisation is an important component of

the IMF programs, a fundamental objective is the reform of the banking

and financial sector. This involves the authorities dealing decisively

with unviable financial institutions and putting arrangements in place

that will allow for greater transparency, accountability and operational

efficiency. The stronger prudential and regulatory standards are essential

for the attainment of a more efficient and effective financial system.

This is necessary for both the attainment of economic stability and

long-term economic growth.

The programs also seek to implement key structural reforms, including

reducing levels of protection, increasing openness to foreign investment

and deregulation/privatisation of certain sectors. These reforms are

designed to increase domestic competition and are fundamental to the

attainment of greater efficiency and market confidence.

Last week the Government announced that it will provide up to $300

million in short-term credit insurance for Australian exporters to

Korea on the National Interest Account of the Export Finance Insurance

Corporation. In order to clear up any misconceptions, let me say that

this is not a $300 million grant.

It is provision of up to $300 million in credit insurance to cover

default. Those taking out insurance pay a premium as with any insurance

policy. The policy may not be called up but it is there if the default

occurs.

The Government has taken this action in order to protect Australian

export markets and safeguard Australian jobs.

As I noted at the outset, Australia has participated in these programs

in recognition of the economic importance of these countries to Australia

as well as the value we place on our broader political relationships

with them. The stability and economic performance of these countries

is important not only for the region, but the broader international

community.

We would not have been in a position to do this, had we not put our

own house in order.

The major economic decisions which we have taken in the last two years

have not been easy. But they have all been in Australias economic

interest. They have been responsible and they have been right.

Ignoring a massive budget deficit would have been more popular than

taking the right and responsible path of fixing it. Running up debt

could have been more popular, in the short term, than repaying it.

The enormous effort that has gone into our microeconomic reform agenda

– including the Wallis reforms, the monetary policy agreement with

the Reserve Bank, the massive program of corporate law reform have

all been initiated and advanced because they will improve Australias

economy and provide opportunities for Australians into the future.

Now is not the time to stop the process of economic reform. If there

is one lesson we should take from Asia it is that adverse external

events can arise quickly with significant effects. Sensible economic

management means strengthening the position not only to meet known

challenges but to provide for contingencies.

There were some who opposed reducing the Budget deficit when we inherited

it nearly 2 years ago. The recent events in Asia have made obvious

the irresponsibility of such a proposition. But some people dont

want to learn.

Two years ago Labor was driven by ignorance and incompetence. But

today they can only be described as mindlessly irresponsible.

Last weeks Labor conference in Hobart committed billions of dollars

on unfunded promises across a range of areas. Labors program could

almost have been a recipe for external intervention. Their economic

spokesman said: “The message here is … that we have to be understood

to be walking both sides of the street”.

When Kim Beazley pledges to maintain Labors “best tradition

of economic management”, it is time for serious concern.

People are a lot smarter than the Labor Party gives them credit for.

They know that you cant walk down both sides of the street simultaneously.

And if you try you run the risk of serious injury.

What Labor is apparently determined to do is to attempt to win votes

by promising to reverse past achievement and opposing future reform.

Walking the other side of the street it is attempting to assuage business

that it doesnt

mean what it says. This is a rather novel approach. Labors message

to business is that business should support it because you cant trust

what it says.

But you can. You know Labor opposes genuine tax reforms.

For our part and for Australias sake we wish this wasnt the case.

The Labor Party knows that Australia desperately needs taxation reform.

Labor knows that the current taxation system is bad for business and

unfair to families.

Labor knows that it destroys incentive and costs jobs.

Labor knows it rewards and encourages tax cheats.

And Labor knows that the existing system is outdated – designed and

built for another era.

And most of all Labor knows that the system is not going to last for

much longer.

Labor knows all of this. But it wont back tax reform, because it

is not interested in doing the right thing.

This will make tax reform harder to achieve. The Coalition Government

does not shy away from this. We are determined to do all we can to

achieve it, not because it is popular, but because it is right for

Australia. It is going to require a lot of leadership, and the Prime

Minister and our Government will continue to give it.

In many respects the future success of taxation reform will lie, not

just in the hands of the Government, but as importantly in the hands

of all those other groups, organisations and individuals who recognise

the need for reform.

Only positive action will bring it about. It will be necessary for

all those who say they believe in tax reform to show they mean it:-

to take the field this year and join the fight.

Now is the time to accelerate the reform process not abandon it, in

the tax area, in the financial area, in labour relations, across the

broad spectrum of the Australian economy. This is the path to meet

the challenges and secure Australias future opportunities.

For Australia there is no future in retreating or reversing. In times

of major external challenge the last thing we need to do is walk both

sides of the street. One will do. And its the right one we need.