Australia Falls For The Lure Of Keating's Rattle
The Age
Wednesday May 13, 1992
THE rattlesnake uses the rattle at the end of its tail to draw the attention of its prey away from the business end of the transaction _ the snake's mouth.
The array of rattles produced by the Keating Government for the edification of the Australian electorate is, I suppose, some sort of compliment to the intelligence of the Australian electorate.
Unlike the rattlesnake's prey, we are aware that the flag debate is a distraction from the state of the economy, but this simply adds spice to the debate rather than turning the electorate's attention to the more substantive issue of economic survival.
If there is no prospect of a national wage increase (after years of sacrifice through the accord), then offer the workers the mirage of wage increases through ``enterprise bargaining". By the time they see through that, the Government (and the ACTU) hope to have got through at least one more election.
The Government is cutting taxes in '94 and '95. But in the meantime it is attempting, in effect, to legislate to impose an income tax surcharge of three to five per cent, rising to nine per cent, which will soak up any additional increase in real incomes in the '90s. Instead of calling it a tax, and using it to finance welfare and development programs, it is being called a superannuation levy, and will be entrusted to the same life and superannuation funds that did so much to impoverish Australia in the '80s.
And this week the Government revealed its budget deficit estimates had blown out again to $9.3 billion in '91-92 and $10 billion in '92-93.
What this blowout shows is that the economy is much more recessed than the Government had thought (or was prepared to admit) when it brought down One Nation in February.
In February the Government forecast a deficit of $6.8 billion based on a growth rate of zero for 1991-92 and a deficit of $8billion (including a $1.8 billion addition to the deficit in One Nation spending and tax cuts) based on a growth rate of 4.75 per cent for '92-93.
The higher the growth, the lower is welfare spending and the larger the tax take, and hence the lower the deficit. Conversely, the lower the growth the higher the unemployment and the greater the welfare spending, lower the taxes and the higher the deficit.
If the deficit is blowing out, the growth rate is deteriorating and there is more scope for budgetary measures to pump up demand without activating inflation.
Why hasn't the Government released the revised growth measures on which the revised deficit figures were based? Why did the Government use the deficit figures as a rattle to divert the attention of the premiers and public opinion at Monday's special premiers' conference in Canberra?
The deficit figures, far from showing that the Government's scope for additional funding for the states has been constrained since February, indicate that if the Government wants to achieve a 4.75 per cent growth rate in '92-93 it will have to lift the level of Government spending or cut taxes.
With the possible exception of dwelling construction, which accounts for less than five per cent of GDP, the recent cuts in interest rates will not affect growth, activity and employment until late 1993 or 1994.
What is likely to happen as a consequence of present policy is shown in the accompanying table, based on forecasts prepared by the Melbourne-based National Institute of Economic and Industry Research (NIEIR).
Unemployment will remain around its present level of about 900,000 throughout the forecast period.
It is scandalous that despite the risk of recession having become apparent as early as 1989, the Hawke/Keating Government did not direct its bureaucracy to plan in detail worthwhile infrastructure projects that could have been brought on quickly, timed to cut out when recovery got under way.
The lost opportunity means the only method of providing a quick stimulus now, which cuts out towards the end of '93, is via an income tax cut of finite duration or, even better, an addition to the family allowance or family allowance supplement, whose effect on consumption would be both quick and finite.
The table shows that even after the so-called recovery in '92-93, both public and private investment will be lower than in '89-90.
In the second half of 1989, private investment spending was running at an annual rate $10billion higher than NIEIR forecasts as the rate in the second half of '93. However, public investment is also forecast by NIEIR to be running $400million a year lower in the second half of '93 than in the same period of '89.
Keynesian economics may be dead. But it is still stupid to squeeze public investment at the same time as private investment has collapsed.
The deadly consequences of the paper-shuffling '80s can be measured in different ways but they all boil down to the fact that the failure to use the period to invest in export and import-competing industries means that anything more than the most moderate stimulus to domestic demand immediately brings the economy hard up against the balance of payments constraint.
The measure of the failure of the Fraser and Hawke/Keating governments to develop an industry policy is the fact that whereas in 1987 only 11 cents in the dollar of domestic spending was on manufactured imports, by '89 the figure had risen to 15 cents. Even since the recession began, manufactured import demand has dropped back to only 14 cents in every dollar of domestic expenditure.
Malcolm Fraser had the excuse of the promise of the ``resources boom" to explain his failure to develop manufacturing industries. It is OK to destroy manufacturing industries while commodity trade is expanding to fill the gap, but it has been apparent since 1984 that there is not much future for Australia relying on commodity trade.
The deadly consequences of the paper-shuffling '80s can be measured in different ways but they all boil down to the fact that the failure to use the period to invest in export and import-competing industries means that anything more than the most moderate stimulus to domestic demand immediately brings the economy hard up against the balance of payments constraint.
The measure of the failure of the Fraser and Hawke/Keating governments to develop an industry policy is the fact that whereas in 1987 only 11 cents in the dollar of domestic spending was on manufactured imports, by '89 the figure had risen to 15 cents. Even since the recession began, manufactured import demand has dropped back to only 14 cents in every dollar of domestic expenditure.
Malcolm Fraser had the excuse of the promise of the ``resources boom" to explain his failure to develop manufacturing industries. It is OK to destroy manufacturing industries while commodity trade is expanding to fill the gap, but it has been apparent since 1984 that there is not much future for Australia relying on commodity trade.
* GROWTH FORECASTS(percent)
'90-91 '91-92 '92-93
GDP -1.4 -0.4 3.8
Including
investment in:
dwellings -12 -2 19
construction -13 -21 -13
plant and
equipment -11 -13 5
public
investment -5 1 2
Employment -0.4 -1.5 1.4
Balance on current
account ($billion) 14.9 11.6 16.2
Source: National Institute of Economic and Industry Research
© 1992 The Age