by CHRISTOPHER HIGGINS*

Introduction The world economy had a bumpy start to the 1980s with the inflationary

aftermath of the second oil shock and a sharp recession in 1982-83. In a substantial turnaround it closed the decade in the seventh, and therefore record, year of expansion in trade and production. Since 1982 the industrial economies have grown at an annual rate of 3 % %, Despite caveats associated essentially with heavy international and domestic debt, and with very large payments imbalances between major economies, prospects are good for continued expansion of the global economy. The Asia-Pacific region, which grew particularly strongly in the 1980s (annual rate of 8% since 1982). seems set for another very dynamic decade.

This encouraging retrospective and prospective performance owes much to inflation control, and to favourable conditions for private activity: fiscal restraint and the retraction of the public sector on a number of fronts, healthy profits and freely functioning capital markets. At the level of structural or microeconomic policies, most governments around the world have been engaged in reform guided by market-oriented precepts.

Private investment has increasingly strengthened-later in Europe than elsewhere, but now decidedly so there as well-contributing to the expansion's longevity.

Australia has been very much part of the reform wave. The 1980s have been a period of remarkable and fundamental economic and social policy reform in this country along economic rationalist lines. While the consequences within the decade have already been considerable, many of the changes which will flow from the altered policy framework are only just beginning to appear. There are, therefore, grounds for optimism about the shape of our system as we enter the 1990s.

Australia has also shared in the better economic performance of the 1980s. Economic growth has strengthened and inflation has been reduced. The major imbalance between wages and profits, which emerged in the mid 1970s and bedevilled the economy for more than ten years, has been corrected decisively-as a result of large falls in real wages. Employment has grown strongly over the past six years. In fact, no OECD country has matched the sustained employment growth recorded in Australia over this period. Business investment has recently surged.

* Secretary to the 'Ikeasury. Opening Address at Consult Australia Annual Forum, Canberra, 16 November 1989.

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There have, however, been several less welcome developments. Although the rate of inflation has declined to around 8% at present, it remains too high and is well above that of our major trading partners. The current account deficit has been persistently large in the 1980s (averaging around 5 % of GDP compared with a long-term average of around 2 ?h %). This has resulted in a large build-up in net external liabilities, which now stand at 42% of GDP, compared with 21% at the beginning of the decade.

Opinion leaders, managers and policy makers cannot, therefore, rest on their oars: sustained cruising is not yet assured.

The following remarks address 1990, on the one hand, and the 1990s on the other. The former provides a focus for describing immediate difficulties, while the latter provides a framework for reviewing the structural achieve- ments and the challenges which lie ahead.

1990 High interest rates

High interest rates are a prominent feature of the current economic scene in Australia. Why, and what is their role in economic adjustment?

The main proximate origin of the rise in interest rates over the past year or so is to be found in the illustrative fact that domestic demand expanded twice as fast as production in 1988-89: almost 8% compared with less than 4%.

Not surprisingly, there was general upward pressure on prices. That tendency was reinforced by private investor reactions to the equity market collapse of October 1987 and pronounced property price inflation emerged. On the other hand, nominal wage increases were contained-especially compared with historical experience-and the nominal exchange rate strengthened despite the widening current account deficit. While the rise in goods and services prices was therefore not as great as in similar periods in the past, the lift in inflation and in inflationary expectations found its way into interest rates.

On top of that automatic market response, monetary policy was tightened to reduce excess demand-with an eye to both inflationary pressures and import spill-over.

Investment surge It is clear that the main source of the strengthening in domestic demand

has been a strong lift in private investment spending, several aspects of which are worth noting:

first, the investment and associated expansion of the capital stock have been concentrated in the private sector: second, while private dwelling investment increased rapidly, so did business investment: third, the expansion in business investment-unlike the predecessor phases in the early 70s and early 80s-has not been concentrated in the resource sector; rather, it has been broadly based; and

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fourth, business investment relative to GDP has now reached its highest level on record (13.5%). This surge of investment can be attributed to the lift in business

profitability and the improvement in the general business climate (Chart 1). Economic policy has no doubt played an important role in the widespread build-up in confidence and business dynamism. Much reduced public sector spending and borrowing and sustained wage restraint have been fundamental. Nominal and real wage restraint not only facilitated investment, but also employment-hence underpinning consumption despite falling real wages. In addition, the prolonged world economic expansion has now led to a recovery in Australia's terms of trade, and the consequent addition to real national income was an important expansionary influence during 1988-89.

CHART 1 FACrOR SHARES [a]

Per cent Per cent 80 55

W.gea.Salarica and Supplsrnenta(LiIS)

75

70

65

60

55

50

1966-67 1970-71 1974-75 1978-79 1982-83 1986-87

50

45

40

35

30

25

20

(a ) The share of wages, salaries and supplements and gross operating surplus in private non-farm corporate sector gross product a t factor cost

The recent strength of the manufacturing sector merits particular note. Over the last two years:

investment in the manufacturing sector increased by an average of 14% per annum; the Bureau of Industry Economics estimates that the stock of capital grew by more than 6% each year; employment increased by an average of 4% per annum;

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output increased at an average rate above 6% and productivity at over 2%; and exports increased at an average rate of around 7 % in volume. As the level of domestic demand eases, more of that enhanced productive

capacity will be available to sell in foreign markets and to replace imports; net exports will rise.

Whenever demand expands strongly in Australia imports expand even more rapidly (see Chart 2). 1988-89 was no exceptior?, and the high direct import content of the surge in investment exacerbated the linkage. Import volumes grew by 25% in 1988-89. This widened the current account deficit sharply despite the higher terms of trade. Against the background of already elevated external debt servicing, that widening was also part of the story of higher interest rates.

CHART 2 ENDOGENOUS IMPORTS AND GNE

~ ~~~ _____ ~~ ~~

6o I - ~ ~~

50

4 0

- n l , l , l l l , I , , , I , , I . , I , I I . , l ~ . ~ . I I , . ~ l l . / l l l l ~ I

Jun-70 Mar-72 Dec-73 Sep-75 Jun-77 Mar-79 Dec-80 Sep-82 Jun-84 Mar-86 Dec-87 Sep-89

laverage 1984-85 prices, sal MEG t GNE .-

Current account deficit and external debt In looking at the current account deficit, it is important to focus first and

foremost on the spending and saving patterns of which it is the counterpart. Former UK Chancellor Nigel Lawson propounded what can be termed the

consenting adults defence of some current account deficits (CAD). If, as in the UK and Australian cases, the public sector is not a net borrower, then

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the CAD is the counterpart of private decisions to spend and borrow. Since these are voluntarily entered into (by consenting adults) the State has no particular role to play in relation to that CAD. Such a line of argument has been forcibly advanced in Australia as well.

On the face of it, this viewpoint has conceptual appeal, but some elaboration is required to reveal its strengths and weaknesses. One of its strengths is to focus on the domestic counterpart rather than on the composition of the current account itself, or on the composition of capital flows. In the Lawson presentation, provided the counterpart spending, borrowing and financing decisions are commercially based in the private sector, they are “optimal”. On the other hand, if they occur in the public sector there is a presumption that they will not be commercially serviceable and therefore an excessive burden on future generations of taxpayers. But the domestic counterpart analysis should be taken one step further. Most would agree that there is at least a potential difference between a private borrowing requirement:

which results from increased investment (for unchanged saving): and one which results from lower saving (increased consumption) for unchanged investment. The key thing is thus to look at the domestic national accounts aggregates

This is done in Chart 3. It can be seen that the recent increase in to see what is the basic source of the external deficit.

borrowing from abroad reflects the surge in private investment: the private saving ratio has changed little: public and hence national saving has risen substantially; and but not as much as private investment. Given the sheer strength of investment now and the consequences for

imports, especially of capital equipment, it is ironic to recall that scarcely more than two years ago everyone was complaining about the lack of investment response which policy had been trying so hard since 1983 to produce. Economic movements are often like that-many observers look for instant results, appreciating neither the lags nor the momentum of movements once they are under way.

It is to the private investment ratio one should look to decide whether the CAD is benign or otherwise, in the sense that the capital flowing from the rest of the world is most likely to generate future income to service it. Australia’s CAD is by this criterion relatively benign.

But the matter cannot be left there. Debt bygones are not bygones-they must be serviced and our net income deficit is rising inexorably-and a significant portion of our stock of indebtedness to foreigners has been built up on account of past public borrowing which is not generating adequate returns (see Attachment 1 and Chart 4).

Attachment 1 draws out the not widely appreciated fact that while the stock of foreign equity in Australia has represented a rather steady proportion of GDP over the decade, there has been a rapid build-up in Australian equity abroad. As can be seen from Chart 4, this is an important

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CHART 3 SAVlNG AND INVESTMENT

Panel A: National Saving and Investment (a) Percentage of GDP

24

22

30 1

- - Saving

(a) Based on national accounts estimates. The difference between national saving and investment represents net lending to overseas plus the statistical discrepancy. Positive values of the statistical discrepancy, such u in the lkct two ycars. mean that the gap bctwecn saving and investment is less than net lending to overseas.

(b) Data from 1976-77 onwards are b a d on the 1987-88 annual national accounts and subsequent quarterly national accounts. Because figures for earlier years are not fully consistent with these estimates. public saving prior to 1976-77 has been derived by subtracting the net PSBR from public investment; private raving has been derived u the residual bctwe.cn national and public saving.

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CHART 4 EXTERNAL LIABILITIES

i-

/ 1 /

Panel A: N e t Externa l Liabilities Percentage o f COP

per cent

Panel B: C o m p o n e n t s of Net Debt Percentage of GDP

per cent

Year ended June

Panel C: Publ ic Gross Debt Percentage o f GDP

Year ended June Note: F a 1989. C'rcollh Enlsrprmc% intludc 5b!c Enterprirc3

Panel E: Foreign Equi ty i n Australia Percentage o f GOP

oer cent

I I

Panel F: Austral ian Equity Abroad Percentage of GOP

per cent

20

15

Year ended June Year ended June

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counterweight to the growth in overseas debt and has been part of the explanation for the fact-also not widely appreciated-that Australia’s net external liabilities have in fact fallen relative to GDP over the past couple of years. However, a rebound is on the cards in the short-run and stabilisation of the ratio will require a significant reduction in the CAD over time.

While there are no universally applicable debt servicing thresholds, rapidly growing external obligations often means that the borrowing country must allocate a rising share of its production to meeting payments due to foreign creditors, leaving less for domestic consumption. The further this process goes, the most difficult it is likely to be to satisfy domestic ex- pectations of rising living standards.

This is, no doubt, an important source of unease about Australia’s growing external liabilities burden, even though the bulk of recent borrowing has been commercially based.

Policy has a role to play because it is judged that if net external liabilities were to continue indefinitely to increase as rapidly as they have been, questions would arise about the capacity of the economy comfortably to service those obligations. While there has been no shortage of potential foreign lenders to Australian enterprises, global financial markets have placed a sizeable risk premium on $A assets in recent years. Continuing evidence will be needed of satisfactory progress towards internal and external adjustment for real interest rates not to stay high or rise further in the period ahead. On the other hand, international experience suggests that-provided there is confidence that progress is being made-global capital markets are prepared to finance external account imbalances over much lengthier periods of adjustment than previously thought likely.

The external account situation has clearly given added impetus to the need for excess demand and inflationary pressures to be reduced.

The policy task is not as straightforward as it might seem. A combination of a rapidly rising Budget surplus and sharply increased interest rates would normally be a sure recipe for a quick slowdown in spending and importing. There are, however, some powerful countervailing forces at work:

ongoing wage restraint and, until very recently, buoyant demand, are keeping profits, investment and employment strong; further fiscal retraction may still be improving the climate for private sector activity, particularly investment (what economists term “crowding- in”); and a high proportion of new plant and equipment is directly imported so that, as noted above, a strong investment phase means a strong import phase. Despite the strength of these offsets there are growing signs that growth

in domestic demand is easing. There is, of course, no intention to produce a recession; the intention is to slow domestic demand so that net export demand can take up a greater share of output. Some slowing in activity as well as demand is likely to occur. Some businesses will experience difficulties; those which are highly geared and highly dependent on domestic demand, or which are exposed to speculative investment positions in

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property will be relatively adversely affected. In particular cases, as we are seeing, the effects can be severe.

Overall, however, there is a reasonable chance of securing a “soft landing” for the economy. Of crucial importance in that respect will be the trend in wage costs. Both of Australia’s two previous recessions in my generation-in the mid 1970s and the early 1980s-were importantly attributable to massive increases in wages. These wage explosions set inflation alight, eroded business profitability and competitiveness and greatly weakened private sector confidence. “Hard landings” were the inevitable result. This time, wages have been relatively restrained and business profits are high. Furthermore, the disturbances in the world economy that occurred in the mid 1970s and the early 1980s-which exacerbated our homegrown diffi- culties-are not a feature of the present scene.

THE 1990s When the present “effervescence” in demand has dissipated somewhat,

where will the Australian economy be in terms of longer-term adjustment? That is, of course, a very complex and difficult question, and I do not presume to answer it in full. It can be said, however, that the answer ultimately depends on the extent to which we have improved our underlying competitiveness.

That will no doubt be benefiting from the strong investment in plant and equipment that is now under way. We should not, however, lose sight of the enhancements to the stock of human capital that have also been going on as a result of heightened emphasis on education and training and the refocusing of the immigration program. Beyond increments to the stocks of physical and human capital is the way they are organised in production: the framework and institutions of economic organisation. As we enter the 1990s I wish to recall some of the fundamental framework reforms of the 1980s and sketch the unfinished agenda.

Wages and industrial relations A good starting point is wages and industrial relations. Since early 1983,

real unit labour costs in Australia have fallen by more than 14%. That is the major factor behind the substantial improvement in profitability, investment and job growth. More recently, and despite very tight labour market conditions, the wageltax trade-off negotiated with the ACTU has laid the basis for continuation of wage restraint and high profits. The Accord process is now being used to achieve a major restructuring of industrial awards and union coverage as a critical extension of the changes in wage determination arrangements of the 1980s. That process facilitated the systemic move away from wage indexation and towards decentralised negotiations at the industry or enterprise level, focused on improving productivity and efficiency at the workplace. Underpinning the Accord pro- cess has been, of course, a change in employee attitudes; what the Secre-

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tary of the ACTU recently referred to as “the fundamental thing. . . getting companies to earn enough money so that they can invest in capital and employ people”:

Looking behind day-today rhetoric and argumentation, widespread recognition of the inadequacies of Australia’s labour market institutions has emerged, together with a national effort to tackle them. Indeed, the following broad objectives command considerable adherence:

awards need to be restructured along industry and enterprise lines, simplified and made less prescriptive; there should be fewer unions within each enterprise or industry, forming one bargaining unit; and there should be greater scope for flexibility across industries and enterprises with respect to wages and working arrangements. One can detect, also, some commonality in the awareness of the important

sequencing and timing issues involved. In particular, it is generally recognised that a move to permit greater relative wage flexibility and greater diversity of working conditions, without first reforming the structure of awards and unions, would give rise to severe difficulties. Because of the imbalance between any individual enterprise and an array of powerful craft- based unions, bargaining along those lines is not only subject to the Australian tradition of comparative wage justice, but could easily develop into a wages explosion in buoyant economic conditions, or if competition in key product markets is not strong.

The process now under way of simplifying awards, reducing the number of classifications and ensuring that rates of pay for these classifications are consistent across awards will make it possible to combine awards effectively and efficiently along industry and enterprise lines. Hand in hand with this process of rationalising award coverage will need to be a rationalisation of the coverage of unions and employer associations, the primary respondents in individual awards. As these reforms proceed there will be greater scope for flexibility and differentiation between enterprises, both within the centralised system and through use of the certified agreements provisions in the Industrial Relations Act.

The task of reforming union and award structures will not be easy, of course, and there are different views about the appropriate mix of carrot and stick in the incentives facing the individuals involved at the grass roots. But this does not mean that labour market reform must necessarily proceed slowly. On the contrary, the recent National Wage Case decisions, the 1988 changes to the Industrial Relations Act, the commitment of the ACTU leader- ship to reform, and the current process of award restructuring, all mean that significant progress should be made during the next few years. For example, at its recent Congress, the ACTU committed itself, as a matter of

1. Bill Kelty, address to BIE-BRW Manufacturing Outlook Conference, Business Review Weekly, 22 September 1989.

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priority, to getting its own house in order with respect to union structures. There has already been some progress on this front under the award restructuring processes.

It seems probable that the wage determination system in place in the mid 90s will be quite different from that of the mid 80s, representing a decade of significant change, in contrast to the glacial norm in this sphere of Australian society.

The public sector The big figure picture of the transformation in public finances is well

known (summarised in Attachment 2). Less well recognised is a range of qualitative changes in public sector

activities (see also taxation below) guided by the following principles: better targetting of welfare programs with the repair of old, and introduction of new, means tests; ensuring benefits are open only to the genuinely eligible with a welfare “safety net” that does not unnecessarily produce dependency traps; increasing participation in, and the provision of incentives for, education and training relative to unemployment; greater use of market signals, through the imposition of user charges in a range of activities; increased cost recovery; improving the efficiency of the Commonwealths own administration and the use of its assets; and reform packages for business enterprises designed to reduce controls Over day-today operations, replacing them by strategic oversight through corporate plans and target rates of return. (Similar initiatives have been taken by some State Governments.) Following a protracted period of expenditure restraint the time will

eventually come where attention has to be given to additional infrastructure spending. In the meanwhile there is considerable unexplored margin, applying the above principles, for improved efficiency of existing infrastructure such as railways and ports.

An interesting illustration of the scope of qualitative change to public programs is provided by the following movements in “dependency ratios” (the strength of employment has, of course, also been a contributing factor):

total pensioners and beneficiaries relative to the labour force rose from 37.2% in 1978 to a peak of 47.1% in 1983; the 1988 ratio was 40.6%; age pensioners relative to the population of pensionable age have fallen to 60.7% from 73.5% in 1983 [and a peak of 77.4 in 1978); and unemployment beneficiaries relative to ABS survey unemployed rose from 74.4% in the three months to March 1980 to a peak of 98.0% in the three months to July 1986, and have been subsequently reduced to 78.2% in the three months to October 1989.

The private sector Parallel to those basic system changes in government spending and own-

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account activity have been changes in the framework within which the private sector operates.

’Igxation reform Tax reform in the 1980s has been governed by the tenet that the taxation

system should impact evenly on business sectors and transacfions, so allowing normal commercial forces, rather than tax rules, to determine the pattern of activity. This is encapsulated in the descriptive and apt notion of the “level playing field”.

Recent years have seen a number of major changes to the taxation system premised on this simple, fundamental principle: capital gains tax, fringe benefits tax, expenses substantiation, dividend imputation, effective economic life depreciation and taxation of income from gold mining.

These measures have substantially broadened the tax base together with government spending cuts opening up scope to reduce tax rates, often quite substantially, thereby enhancing work and investment incentives. The top personal rate has been reduced from 60% to 47% (from 1 January 1990), and the company tax rate from 49% to 39%.

As a result of the imputation system and the capital gains tax, the impact of taxation considerations in decisions as to whether to gear an investment or obtain equity finance; to purchase assets yielding capital gains or to invest in income earning ventures; or to retain or distribute corporate income, has been substantially reduced.

This change to a much more neutral tax treatment of the rewards of different corporate strategies will have a far reaching impact on financing and investment decisions. At the same time, it will facilitate the develop- ment of a stronger equity market, a key ingredient to a well-functioning capital market.

The Superannuation industry, in particular, will have a crucial role to play in that process. With the spread of superannuation in the workforce, and the extension of concessionally taxed rollover facilities, the assets of superannuation funds have risen quickly, now exceeding $100 billion and accounting for around a third of household saving. This growth is set to accelerate: by the year 2000 funds’ assets are likely to be growing by at least $60 billion a year.

With such a key role as a pool for household savings, it is critical that the superannuation industry operates in an environment that is subject to appropriate tax treatment and competition.

Tax reform of superannuation, by extending the imputation arrangements to cover superannuation funds, has been directed squarely at that objective. lhx reform alone, however, will not achieve the broader objective of maximising the contribution of these pools of capital to national economic growth. It also requires a competitive and dynamic industry that will achieve, through the pressure of competitive market forces, the efficient use of investment resources, thereby maximising returns to fund members and the contribution to economic development alike.

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Before leaving the subject of taxation, it should be emphasised that tax reform, despite the progress of recent years, is a continuing process. Some differences in the taxation treatment of different forms of income are unavoidable, and inevitably arrangements aimed at exploiting these differences will arise. It must be of concern, however, that much high-cost effort is put into such arrangements for tax, rather than commercial, reasons. Such effort is a deadweight loss to the community, as well as a potential threat to the equity of the tax system. For this reason, the process of tax reform must continue to have as one of its chief objectives the diminution of tax considerations in financing and investment decisions.

Financial deregulation The deregulation of Australia’s financial markets has improved the

efficiency of capital allocation, resulting in cost-savings and innovations in services provided to other sectors of the economy. Opportunities, including in the international sphere, have been opened up for Australian business to exploit their comparative strengths free of the earlier shackles of rationed credit, exchange controls, distorted interest rates and less flexible exchange rates. At the same time, it has exposed economic agents to more immediate and more direct competitive pressures than in the past, as well as imposing an important discipline on economic policy as financial markets make their judgements on the effectiveness of policy. These competitive pressures have already raised, and are bound to raise further, the efficiency of economic activity. Australians are increasingly comparing their performance not only with our own past but with that of the rest of the world.

On the basis of fundamentals there is no strength in the case of the re- regulationists; advocates of that course need to look beyond the superficial facts of increased borrowing and a large current account deficit to their causes. These lie other than in freely functioning capital markets. Moreover, on practical grounds, there is no putting the free capital markets genie back in the bottle.

Product markets Concentration on the four areas of wage determination, public activity,

taxation and financial markets is not meant to suggest that product market reform is unimportant. Indeed, some aspects of government business enterprise reform-in transport and telecommunications, for example- touch very directly on product markets. Beyond that, industry assistance has been lowered and is set to go lower, although pockets of high protection remain. There have also been measures to improve efficiency in air, land and sea transport and communications. In many of these spheres more efficient arrangements cannot be achieved by government action alone and, in particular, not by the Commonwealth acting alone. There is clearly an ongoing reform agenda in product markets, albeit difficult to progress rapidly.

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CONCLUSION Outward orientation

With the abolition of exchange controls and the globalisation of capital markets, Australian investors have been in a better position to acquire foreign assets, as well as to incur foreign liabilities. The lift in Australian equity abroad (described above) is part of what Kevan Gosper refers to as “a deliberate outward orientation by Australian business”? Gosper lists this as one of two factors which stand out as encouraging in the changes since the early 1980s.

His second, also consistent with the theme of my address, is “a greater philosophical reliance by Government on market forces”. That outward orientation reflects “a very different business culture driving firms from that of barely a decade ago’’. Not least among its benefits is what those businesses and individuals are bringing back to Australia in the form of acquired insights and skills: exposure to international competition and best practice can only serve to help us work “smarter”-not only relative to our own past but relative to others.

The recent experience with building offshore assets shows how major shifts in the policy framework can lead to rapid adjustments in private sector behaviour. It is important, of course, that private investors take advantage of new opportunities afforded by structural reform. As noted above, this process has been frustratingly slow in some areas. It is also important that the private sector play a constructive role in the debate surrounding the reform agenda. The task facing governments-Commonwealth and State-in overturning long-established rigidities in the structure of the economy is invariably difficult. Progress will be the more likely if all participants have regard to the broad national interest rather than trying to preserve sectional cushions. Encouragingly, some of the major business organisations in Australia now systematically place a higher weight on the national interest than they did a decade ago.

Australia’s intensified outward orientation and the heightened national interest perspective are not confined to business, but have become a central plank of trade union thinking. It is worth recalling that the watershed “Australia Reconstructed” reflected, inter alia, insights from practice in Europe and Scandinavia gained first-hand by a study group of unionists. The Secretary of the ACTU was quoted above on profits, investment and employment; he said in the same speech:

For if we have come to one conclusion, the only basic conclusion you have got to come to is that this country has to be competitive and adaptive in the context of the rest of the world. There is no use hiding that fact.3

2. Kevan Gosper, Chairman and Chief Executive, Shell Australia Limited, “Australia’s Bade and Business Links-A look into the 1990’s’’, presented to Australian Business in Europe, 19 October 1989.

3. Bill Kelty, op. cit.

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As has been widely commented on, the floating of the exchange rate and abolition of exchange controls was a fundamental, pivotal step in Australia’s opening to the rest of the world. Among other things, it has contributed to a noteworthy elevation in the nature of the economic debate in Australia, and as just noted in the formal positions of the “social partners”. That too enhances the prospects for continued and extended economic reform.

While the “productive culture” seems to be taking deeper root in this way it requires ongoing nourishing. And finding the right weight for environ- mental protection in rising living standards-the quest for environmentally sustainable development-will place additional strain on society’s decision- making processes in the 1990s.

Inflation As already observed, one of the major problem areas in economic

performance to set against the achievements of the 1980s has been inflation. A high rate of inflation has become deeply embedded in Australian attitudes and institutions. Changing those attitudes, and the behavioural patterns which spring from them, will require sustained effort, not only by policy makers but also by leaders of business, unions, welfare and other community groups.

The international challenge The 1980s again demonstrated the extent to which Australia’s economic

fortunes can be affected by external shocks, or even less sharp changes in the pattern of global economic activity. Australia is, of course, relatively powerless to influence such developments. What can be done is to improve the economy’s capacity to cope with them.

But such changes to the international economic environment present opportunities as well as posing challenges. Nowhere are such opportunities presently more evident than in the very rapid economic growth occurring in the Asia-Pacific region. Australia has thereby good prospects for enhanced prosperity.

Sufficient examples of Australian businesses proving successful in the international arena already exist to indicate that we are capable of making our way in global markets. But this will not happen generally without more sustained effort by business, unions, governments and the community at large. What is required are further modifications to the economic institutional framework, especially with respect to structural impediments to growth, including further improvements in employee and management work practices which raise productivity and competitiveness.

Australia has made considerable progress in improving its basic economic framework during tthe 1980s. We have no worthy alternative but to ensure that process not only continues, and at a pace appropriate to the magnitude of the problems we carry with us from the 1980s into the ’90s.

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ATTACHMENT 1 EXTERNAL LIABILITIES-REFER CHART 4 Public Sector

The Commonwealth has been redeeming debt (Panel C) and its share of total gross debt has fallen from its recent peak of 22% in June 1987 to 13% in June 1989. Commonwealth enterprises’ debt (Panel C) has continued to rise relative to GDP (but as a rather constant share of total gross debt of about 8%). For those where borrowing has been permitted to expand (e.g. Qantas) servicing is unlikely to involve future calls on collective resources (taxpayers of the next generation). The debt of the State sector as a whole (Panel C) accumulated rapidly in the late 1970s and early 1980s as the counterpart of borrowing for public spending some of which is generating returns below servicing cost. It has continued to expand in recent years, and now represents some 20% of gross debt compared with 17% at June 1985 and 6% at June 1981. Efforts to lift efficiency in these enterprises and activities-in part in consequence of recognition of the debt overhang-will help reduce the call on the general taxpayer. In the meanwhile it seems highly desirable to limit borrowing, and policy has been doing that.

Private Sector Private gross debt (Panel D) is some five percentage points of GDP higher than it was at June 1985 and represents 55% of total gross debt, as it did in 1985. All of the increase shice 1985 has been intermediated via financial enterprises. There has been a sharp lift in Australian equity abroad (Panel F). Foreign equity in Australia has been fairly stable (Panel E). So that Australia’s offshore equity assets are already more than half foreign equity in Australia. Australian private lending abroad has been much more stable, rising from

1% to 2% over the decade.

ATTACHMENT 2 PUBLIC FINANCES

Commonwealth Budget transformed from deficit of 4.2% of GDP in

four successive real falls in Commonwealth outlays reducing their ratio

Commonwealth revenue to GDP ration the same in 1988/89 and 1989/90

total public sector shifted from net borrowing balance of 6.7% of GDP

1983184 to surplus of 2.5% in 1989/90;

to GDP from 30.0 to 23.7;

as in 1982/83;

in 1983/84 to net lending of 1.2% in 1989/90;

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total general government outlays reduced from 36.1% of GDP in 1983/84 to 32.1% (1988189); and Commonwealth debt relative to GDP halved from its peak of 26.8% at June 1986 to 13% at June 1990: overseas component reduced from 5.8% to 2% of GDF!

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