*

TREASURER

PRESS  RELEASE NO. 137

EMBARGO ADDRESS BY THE TREASURER, THE HON PAUL KEATING, MP, TO THE  ASIA SOCIETY, NEW YORK - WEDNESDAY, 30 OCTOBER 1985

IT IS A PLEASURE TO RETURN TO THE ASIA SOCIETY TO DISCUSS  WITH YOU ONCE AGAIN THE PROSPECTS FOR THE AUSTRALIAN ECONOMY.

I WAS LAST HERE JUST SIX MONTHS AGO, AND THE FACT THAT I HAVE  RETURNED AFTER SUCH A RELATIVELY SHORT TIME SERVES TO  INDICATE YET AGAIN THE HIGH VALUE THAT WE IN AUSTRALIA PLACE  ON OUR RELATIONSHIP WITH THE UNITED STATES.

BUT THE MAIN REASON FOR RETURNING IS SIMPLY THAT A LOT HAS  HAPPENED IN ECONOMIC POLICY IN AUSTRALIA DURING THE PERIOD  SINCE I WAS LAST HERE, AND IT IS TIMELY TO BRING YOU  UP-TO-DATE WITH THOSE DEVELOPMENTS.

SOME OF YOU MAY RECALL THAT WHEN HERE IN APRIL I DESCRIBED  HOW THE AUSTRALIAN GOVERNMENT NEEDED TO FACE AND MEET A  NUMBER OF CHALLENGES WHICH CONFRONTED IT.

THESE WERE, FIRST, THAT WE HAD TO BRING ABOUT AN ADEQUATE  ADJUSTMENT TO THE 201 DEPRECIATION OF THE AUSTRALIAN DOLLAR  THAT OCCURRED EARLY THIS YEAR. v

IN PARTICULAR, WE RECOGNISED THAT WE HAD TO ENSURE THAT THE  PRICE EFFECTS OF THE DEPRECIATION WERE NOT BUILT INTO  ON-GOING INFLATION.

SECOND, WE HAD SET OURSELVES THE TASK OF ACHIEVING A FURTHER  SIGNIFICANT REDUCTION IN THE DEMANDS PLACED ON THE ECONOMY  AND ITS FINANCIAL MARKETS BY THE GOVERNMENT SECTOR.

THAT TASK WAS MADE ALL THE MORE IMPERATIVE BY THE DOLLAR'S  DEPRECIATION.

AND THIRD, WE HAD SET OURSELVES THE TASK OF UNDERTAKING A  MAJOR REFORM OF OUR TAXATION SYSTEM.

WE HAD TO RESOLVE THE DIRECTION THOSE REFORMS WOULD TAKE, AND  THEN BEGIN THE PROCESS OF IMPLEMENTING THEM.

I CAN DECLARE TODAY THAT WE HAVE TACKLED ALL THESE TASKS IN  FULL.

WE HAVE RESPONDED TO THE DEPRECIATION OF THE AUSTRALIAN  DOLLAR BY GAINING ACCEPTANCE OF OUR TRADE UNIONS OF THE NEED  FOR WAGES TO INCREASE AT A LESSER RATE THAN THE INCREASE IN  OUR CONSUMER PRICE INDEX.

THE TRADE UNIONS HAVE ALSO ACCEPTED THE NEED FOR CONTINUED  WAGE RESTRAINT WELL INTO THE FUTURE. -

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THIS FORMULA IS WORKING IN THE AUSTRALIAN CONTEXT BECAUSE OF  THE SPECIAL AGREEMENT, OR ACCORD, THAT THE GOVERNMENT, LED BY  OUR PRIME MINISTER, BOB HAWKE, HAS WITH OUR TRADE UNION  MOVEMENT.

ALREADY, IN OUR LATEST INFLATION FIGURES, WE HAVE THE  EVIDENCE THAT OUR STRATEGY OF CONTAINING THE INFLATIONARY  EFFECTS OF THE DEPRECIATION IS SUCCEEDING.

IN TACKLING THE SECOND OF THOSE TASKS WE ADOPTED A TWO-STAGE  APPROACH, AND IN BOTH MAY AND OUR REGULAR BUDGET STATEMENT IN  AUGUST, WE HAVE IMPLEMENTED A POLICY WHICH SUBSTANTIALLY  REDUCES THE RATE OF GROWTH IN GOVERNMENT SPENDING AND OUR

PUBLIC SECTOR BORROWING REQUIREMENT.

ON THE THIRD OF THOSE TASKS, LAST MONTH I ANNOUNCED A  COMPREHENSIVE PACKAGE OF TAXATION REFORM MEASURES.

THESE INCLUDE VERY LARGE CUTS TO PERSONAL INCOME TAX RATES,  THE COST TO THE REVENUE OF WHICH FAR OUTWEIGHS THE ADDITIONAL  TAXATION WHICH WILL BE RAISED BY THE MEASURES INCLUDED IN THE  PACKAGE.

TONIGHT I WILL BRING YOU UP TO DATE WITH THESE AND OTHER  ECONOMIC POLICY DEVELOPMENTS.

NOT THE LEAST OF WHICH IS TO POINT OUT THAT, AS WAS THE CASE  WHEN I WAS HERE LAST, THE AUSTRALIAN ECONOMY IS STILL GROWING  STRONGLY, AND THE OUTLOOK FOR THE FUTURE IS THAT WE WILL  CONTINUE TO DO SO.

I WISH TO ALSO OUTLINE TO YOU DETAILS OF THE LIBERALISATION  OF OUR FOREIGN INVESTMENT POLICY WHICH WAS ANNOUNCED BY MR  HAWKE IN AUSTRALIA YESTERDAY.

MR CHAIRMAN, WHILE:IT IS NATURAL THAT I SHOULD EMPHASISE THE  IMPORTANT EVENTS OF THE PAST SIX MONTHS, IT WOULD BE A '

MISTAKE TO VIEW THEM IN ISOLATION.

THE ECONOMIC POLICY TASKS TO WHICH THE AUSTRALIAN GOVERNMENT  HAS BEEN DIRECTING ITS RECENT ENERGIES HAVE BEEN INTEGRAL TO  A COHERENT OVERALL STRATEGY UPON WHICH WE EMBARKED  2 1 / 2 YEARS AGO.

LET ME BRIEFLY TAKE YOU BACK TO THAT POINT IN MARCH 1983 WHEN  THE PRESENT GOVERNMENT CAME TO OFFICE.

OUR ECONOMY WAS THEN IN PARTICULARLY BAD SHAPE.

ECONOMIC GROWTH HAD SLUMPED TO BE NEGATIVE, THE RATE OF  UNEMPLOYMENT HAD ALMOST DOUBLED IN JUST TWO YEARS TO BE  10 1/2% AND INFLATION WAS RUNNING AS HIGH AS 12%.

THAT POOR STATE OF AFFAIRS REPRESENTED THE CULMINATION OF A  LONG PERIOD OF UNDER-ACHIEVEMENT BY THE AUSTRALIAN ECONOMY.

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AFTER BEING A CONSISTENTLY GOOD PERFORMER THROUGH THE 1960s ,   IN THE 1970s AND EARLY 1980s THE AUSTRALIAN ECONOMY WENT  THROUGH A PERIOD OF STUNTED GROWTH.

THROUGHOUT THAT PERIOD INFLATION REMAINED HIGH.

AND THOSE YEARS WERE MARKED BY A SERIES OF TENTATIVE  RECOVERIES, EACH IN TURN CUT-OFF BY THE INABILITY OF THE  GOVERNMENT OF THE DAY TO PREVENT EXCESSIVE WAGES GROWTH  FEEDING INTO INFLATION.

OUR PREDECESSORS REACTED BY RESORTING TO AN OVER-VALUED  EXCHANGE RATE AND MONETARY POLICY AS THEIR CHIEF  ANTI-INFLATION WEAPONS.

NEITHER ARM OF POLICY PROVED SUCCESSFUL.

BUT THEIR EXCHANGE RATE POLICY IN PARTICULAR WAS LATER TO  PROVE TO HAVE HAD A DEBILITATING IMPACT ON THE  IMPORT-COMPETING AND EXPORT SECTORS OF OUR ECONOMY.

PRETTY MUCH AS IS THE CASE NOW IN THE UNITED STATES WITH THE  STRENGTH OF THE $US.

WHILE OF COURSE THE NEW LABOR GOVERNMENT ACTED TO TACKLE THE  CYCLICAL DIFFICULTIES THAT WERE APPARENT, WE SAW OUR TASK AS  BEING MUCH BROADER THAN THAT.

IT WAS NECESSARY TO CHANGE THE FUNDAMENTAL ORIENTATION OF THE  ECONOMY IN ORDER TO CORRECT THE BURDENSOME RIGIDITIES AND  IMBALANCES THAT IMPAIRED US FROM REACHING OUR ECONOMIC  POTENTIAL.

FIRST, WHILE RECOGNISING THAT THE PUBLIC SECTOR HAD AN  IMPORTANT INITIAL ROLE TO PLAY IN STIMULATING A RETURN OF  ECONOMIC GROWTH, WE HAVE ALSO BEEN AWARE FROM THE BEGINNING  OF THE IMPORTANT NECESSITY FOR THE GOVERNMENT'S ROLE TO BE

PARED BACK AS PRIVATE SECTOR ACTIVITY STRENGTHENED.

THE FEDERAL BUDGET DEFICIT, PROJECTED TO BE OVER 5% .'OF GROSS  DOMESTIC PRODUCT IN 1983-84 WHEN THE GOVERNMENT CAME TO  OFFICE, WAS IN FACT HELD TO 4.3% IN THAT YEAR AND REDUCED TO  3.3% IN 1984-85.

THE BUDGETTED FIGURE FOR 1985-86 IS 2.1%, LESS THAN HALF THE  LEVEL OF TWO YEARS AGO.

SECOND, FAR-REACHING REFORMS HAVE BEEN MADE TO THE FINANCIAL  SECTOR. '

WE HAVE SOUGHT TO DISMANTLE UNNECESSARY REGULATIONS WHICH  IMPEDED THE EFFICIENT WORKING OF THE FINANCIAL MARKETS.

AS PART OF THAT PUSH FOR REFORM WE HAVE ADMITTED FOREIGN >   BANKS TO THE AUSTRALIAN BANKING SYSTEM AND, AMONG THE MOST  SIGNIFICANT REFORMS OF ALL, IN DECEMBER 1983 WE FLOATED THE  AUSTRALIAN DOLLAR.

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IN ADDITION, WE REMOVED THE FOREIGN EXCHANGE CONTROLS  ASSOCIATED WITH THE OLD REGIME FOR FIXING THE VALUE OF OUR  CURRENCY.

THE GOVERNMENT'S MOVES IN THE FINANCIAL AREA STEMMED FROM THE  PROPOSITION THAT, IF THE ECONOMY IS TO PROSPER, IT MUST HAVE  AN EFFICIENT AND COMPETITIVE FINANCIAL SYSTEM.

BUT THE GOVERNMENT’S APPROACH HAS NEVER BEEN GUIDED BY ANY  IDEOLOGICAL BENT TOWARDS DEREGULATION FOR ITS OWN SAKE.

IT HAS ONLY BEEN WHERE REGULATION HAS NOT SERVED TO PROMOTE  ECONOMIC EFFICIENCY OR EQUITY OBJECTIVES THAT THE GOVERNMENT  HAS MOVED TO DEREGULATE.

I MAKE THIS POINT BECAUSE LABOUR MARKET DEREGULATION IS SOME  TIMES CHAMPIONED BY SIMPLE ANALOGY WITH FINANCIAL  DEREGULATION.

AND OBVIOUSLY ENOUGH, IN THE THIRD AREA WHERE WE HAVE SOUGHT  TO BRING ABOUT FUNDAMENTAL CHANGES, WE HAVE NOT FOLLOWED THE  DEREGULATORY COURSE.

IN FACT, WE OPTED TO REINFORCE THE EXISTING CENTRALISED WAGE  FIXING SYSTEM IN AUSTRALIA THROUGH OUR ACCORD WITH THE  AUSTRALIAN COUNCIL OF TRADE UNIONS, THE ACTU.

IT IS THROUGH THIS AGREEMENT THAT WE HAVE BEEN ABLE TO  CORRECT MANY OF THE FUNDAMENTAL IMBALANCES IN THE ECONOMY AND  IN IMPORTANT RESPECTS WE HAVE GAINED A FLEXIBILITY IN THE  LABOUR MARKET THAT HAS NOT BEEN ACHIEVED IN AUSTRALIA FOR  MORE THAN A DECADE.

OUR ACCORD-BASED PRICES AND INCOMES POLICY RECOGNISES THE  REALITY OF AUSTRALIA'S LABOUR MARKET INSTITUTIONS AND THEIR  DEEP ROOTS IN THE COUNTRY'S HISTORY.

DEREGULATION IN THESE CIRCUMSTANCES WOULD BE ENORMOUSLY  DISRUPTIVE AND COUNTER-PRODUCTIVE.

THE PRESENT POLICY APPROACH HAS AIMED, SUCCESSFULLY, TO TURN  AUSTRALIA'S LABOUR MARKET INSTITUTIONS TO ADVANTAGE.

AND IT HAS DONE SO.

THERE IS SIGNIFICANT RECOGNITION WITHIN THE BUSINESS  COMMUNITY IN AUSTRALIA OF THIS FACT.

FOR EXAMPLE, THE CHAIRMAN OF THE ORGANISATION THAT REPRESENTS  OUR LARGEST COMPANIES, THE BUSINESS COUNCIL OF AUSTRALIA, MR BOB WHITE COMMENTED THE OTHER DAY THAT THE ACCORD HAS  SERVED BOTH EMPLOYERS AND THE ECONOMY WELL, AND THAT IT WAS

THE PRIME REASON BEHIND THE 2% DROP IN UMEMPLOYMENT OVER THE  PAST 2 YEARS. -

I AM NOT SEEKING FOR A MOMENT TO PRETEND MR WHITE OR THE  BUSINESS COMMUNITY AS A WHOLE ARE UNCRITICAL SUPPORTERS OF  ALL ASPECTS OF THE GOVERNMENT'S APPROACH.

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WE FULLY UNDERSTOOD THAT ONLY BY DOING SO WOULD WE BE ABLE TO  MAKE CERTAIN WE REAPED THE VERY CONSIDERABLE BENEFITS OF  ECONOMIC GROWTH AND JOB CREATION THAT THE DEPRECIATION  OFFERED.

TO BRING ABOUT THAT DESIRED OUTCOME IT WAS WIDELY RECOGNISED  THAT AN ADJUSTMENT WAS REQUIRED TO THE WAGE DETERMINATION  ARRANGEMENTS - PARTICULARLY TO FULL WAGE INDEXATION.

THERE WERE SOME CRITICS, OF COURSE, WHO ARGUED THAT IN THESE  CIRCUMSTANCES THE GOVERNMENT SHOULD ABANDON THE ACCORD AND  REMOVE THE DISCIPLINE THAT HAD BEEN PLACED ON WAGE MOVEMENTS  IN OUR COUNTRY.

THE SIMPLISTIC LABOUR MARKET THEORIES THAT UNDERLIE SUCH A  VIEW ARE WELL KNOWN. BUT WE BELIEVE THAT THE INEVITABLE  RESULT OF ABANDONING THE ACCORD WOULD BE THAT THE STRONGER  UNIONS VERY RAPIDLY WOULD GAIN PAY RISES IN EXCESS OF WHAT

THEY WOULD RECEIVE UNDER INDEXATION.

GIVEN AUSTRALIA'S HISTORY, AS A CONSEQUENCE SIMILAR WAGE  RISES WOULD VERY RAPIDLY FLOW THROUGH THE WHOLE ECONOMY.

IN AN ECONOMY FACING 5% NON-FARM GROWTH FOR SOME TIME THERE  IS NO WAY IN A WAGES FREE-FOR-ALL OUR INFLATION RATE WOULD  NOT HAVE BEEN BLOWN TO PIECES.

IT HAS EVERY TIME WHEN SIMILAR CIRCUMSTANCES HAVE OCCURRED IN  THE LAST 15 YEARS.

THE RESULT WOULD BE A RETURN TO OUR OLD STORY OF A WAGES  BREAK-OUT LEADING TO AN INFLATIONARY SURGE AND THE  CURTAILMENT OF GROWTH.

THE SAME OLD DEFLATIONARY MESSAGE WOULD HAVE BEEN TRUMPETED.

CLOSE DOWN THE ECONOMY TO CLOSE DOWN INFLATION.

THE NOBODY WINS GAME.

THE GOVERNMENT REJECTED THAT APPROACH.

WE SOUGHT THE NECESSARY MODIFICATION WITHIN THE ACCORD AND  DESPITE THE SCEPTICS' VIEWS THAT SUCH FLEXIBILITY WAS  UNATTAINABLE WE ACHIEVED THE DESIRED OUTCOME.

WE GOT THE AGGREGATE FLEXIBILITY WE NEEDED.

AGREEMENT WAS REACHED BETWEEN THE GOVERNMENT AND THE  AUSTRALIAN COUNCIL OF TRADE UNIONS IN SEPTEMBER THAT FOR THE  PURPOSES OF WAGE INDEXATION THE CONSUMER PRICE INDEX INCREASE  FOR THE SEPTEMBER AND DECEMBER QUARTERS OF 1985 SHOULD BE

DISCOUNTED BY 2 PERCENTAGE POINTS. .

THUS, WE ARE NOW LOOKING AT GROWTH IN AWARD WAGES OF AROUND  6% OVER THE COURSE OF THE FINANCIAL YEAR ENDED JUNE 1986 - A  REMARKABLE ACHIEVEMENT FOR AN ECONOMY AFTER A 2 0%  DEPRECIATION.

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THAT IS NOT THE CASE AND IT WOULD BE UNHEALTHY IF IT WERE.

BUT WHILE 2 1 / 2 YEARS AGO THERE WAS VERY GREAT SCEPTICISM  ABOUT WHETHER THE ACCORD WOULD SUCCEED, THERE IS NOW A  WIDESPREAD RECOGNITION THAT IT HAS PLAYED A CENTRAL ROLE IN  AUSTRALIA'S ECONOMIC RECOVERY.

AS AN INDICATION OF ITS EFFECTIVENESS, I POINT OUT THAT  AVERAGE LABOUR EARNINGS IN NOMINAL TERMS INCREASED BY ONLY  3-5%, DEPENDING ON WHICH MEASURE IS USED, OVER THE YEAR TO  MID-1985.

REAL UNIT LABOUR COSTS HAVE FALLEN BY OVER 7% SINCE THEIR  1982 PEAK.

AS A RESULT, REAL LABOUR COSTS HAVE BEEN BROUGHT BACK INTO  BALANCE WITH LABOUR PRODUCTIVITY, AND THE RELATIONSHIP  BETWEEN THE TWO IS NOW SIMILAR TO THAT IN THE LATE 1960'S,  WHEN THE ECONOMY WAS FUNDAMENTALLY MORE HEALTHY.

THIS WAGES MODERATION HAS ALLOWED A SUBSTANTIAL RISE IN  BUSINESS PROFITABILITY.

THE CORPORATE SECTOR GROSS OPERATING SURPLUS HAS RISEN BY  SOME 70% SINCE ITS LOW POINT IN 1982.

THE PROFIT SHARE ALSO IS BACK TO ITS LATE 1960S LEVEL - THE  FIRST TIME IT HAS BEEN RESTORED TO SUCH A POSITION IN  IS YEARS.

THE IMPACT 0"F THESE CHANGES ON THE ECONOMY AS A WHOLE HAS  BEEN VERY SIGNIFICANT.

OVER THE TWO YEARS FOLLOWING THE TROUGH OF THE RECESSION IN  THE SECOND QUARTER OF 1983, REAL GROSS NON-FARM PRODUCT HAS  EXPANDED BY ALMOST 13%.

EMPLOYMENT HAS RISEN BY ALMOST 8% OR 490,000 OVER THE LAST  2 1/2 YEARS - IN ANNUAL TERMS AN EMPLOYMENT GROWTH RATE IN  EXCESS OF 3%.

UNEMPLOYMENT HAS BEEN REDUCED FROM A PEAK OF 10.4% IN  SEPTEMBER 1983 TO 8.1% OF THE WORKFORCE CURRENTLY.

THE RATE OF INFLATION WAS MORE THAN HALVED TO BE 5% AT THE  END OF 1984.

OF COURSE, THE FIRST OF THE PARTICULAR ISSUES I MENTIONED AT  THE OUTSET, THE DEPRECIATION OF THE AUSTRALIAN DOLLAR, HAS  IMPORTANT INFLATIONARY CONSEQUENCES.

WHEN I WAS HERE LAST I DESCRIBED HOW THE CRUCIAL CHALLENGE WE  FACED WAS TO ENSURE THAT THE INFLATIONARY IMPACT OF THE  DEPRECIATION WAS QUARANTINED AND NOT BUILT INTO THE DOMESTIC  COST STRUCTURE.

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BUT GIVEN OUR AGREEMENT WITH THE ACTU ,  I EXPECT IT TO FALL TO  AROUND 6-71 NEXT FINANCIAL YEAR, AND 5-6% IN THE SUBSEQUENT  YEAR.

THE CONSUMER PRICE INDEX FIGURE PUBLISHED LAST WEEK FOR THE  SEPTEMBER QUARTER, AT 2.2%, CONFIRMS THAT THIS SCENARIO IS ON  TRACK, AND DESPITE THE PREDICTIONS OF SOME PESSIMISTS I CAN  EMPHATICALLY ASSURE YOU THAT AUSTRALIA IS NOT ABOUT TO RETURN

TO THE DOUBLE DIGIT INFLATION OF THE PAST.

IN ALL OF THIS IT MUST BE APPRECIATED THAT WHILE THE  DEPRECIATION OF THE AUSTRALIAN DOLLAR IS A CHALLENGE TO OUR  ECONOMIC POLICY MAKING, IT ALSO FORMS PART OF THE NECESSARY  PROCESS OF CORRECTING IMBALANCES AND ESTABLISHING THE BASIS

FOR SUSTAINABLE GROWTH.

EXTERNAL IMBALANCES WERE A SIGNIFICANT FEATURE OF THE LEGACY  LEFT BY THE GOVERNMENT THAT PRECEDED US.

WHILE THE CURRENT ACCOUNT DEFICIT HAD MODERATED IN 1982-83  UNDER THE WEIGHT OF THE DOMESTIC DOWNTURN, TAKING A SLIGHTLY  LONGER VIEW, IT HAD BEEN RUNNING AT AN UNSUSTAINABLY HIGH  LEVEL FOR SEVERAL YEARS BEFORE THAT.

THE PREVIOUS GOVERNMENT'S POLICY OF OVER-VALUING THE EXCHANGE  RATE UNDOUBTEDLY CONTRIBUTED TO THAT DIFFICULTY.

ASSOCIATED WITH THIS RISE IN OUR CURRENT ACCOUNT DEFICIT,  AUSTRALIA'S NET EXTERNAL DEBT HAS RISEN SUBSTANTIALLY IN  RECENT YEARS.

THOUGH I STRESS IT SHOULD BE APPRECIATED THAT OUR DEBT  SITUATION IS COMPLETELY DIFFERENT FROM THAT OF THE DEBTOR  COUNTRIES WHICH CURRENTLY ATTRACT PUBLIC ATTENTION.

INTEREST PAYMENTS ON AUSTRALIA'S FOREIGN DEBT IN 1984-85  REPRESENTED SOME 14% OF EXPORTS IN GROSS TERMS, AND 11% IN  NET TERMS.

THE GROSS FIGURE FOR THE MAJOR DEBTOR COUNTRIES IS TYPICALLY  ABOUT 30%.

FOR A COUNTRY SUCH AS AUSTRALIA THERE IS NOTHING  INTRINSICALLY WRONG WITH CURRENT ACCOUNT DEFICITS AND  BORROWING.

AUSTRALIA HAS BEEN AND WILL CONTINUE TO BE A CAPITAL  IMPORTING NATION.

THERE ARE NO HARD AND FAST RULES ABOUT ACCEPTABLE LIMITS.

MUCH, OF COURSE, DEPENDS ON THE USES WHICH A NATION MAKES OF  ITS DRAWINGS ON THE REST OF THE WORLD'S SAVINGS.

AND MUCH ALSO DEPENDS ON HOW A COUNTRY RUNS ITS ECONOMIC  AFFAIRS.

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THE ONLY WAY THAT AUSTRALIA COULD HAVE ACHIEVED A LOWER  OUTCOME WOULD HAVE BEEN THROUGH A MAJOR RECESSION.

THE TIMING AND EXTENT OF THE PERSONAL INCOME TAX CHANGES  WHICH ARE PART OF THE WIDE RANGING TAX REFORM WHICH I  MENTIONED EARLIER HAVE REGARD TO THIS WAGE DISCOUNT.

IN ADDITION, THE GOVERNMENT AND THE ACTU AGREED THAT IN THE  LIGHT OF THE DEPRECIATION THERE SHOULD BE NO NATIONAL  PRODUCTIVITY AWARD BEFORE THE START OF 1986-87.

FOR THOSE OF YOU WHO ARE UNFAMILIAR WITH THE AUSTRALIAN  SYSTEM I SHOULD EXPLAIN BRIEFLY THAT WAGE INDEXATION  ADJUSTMENTS ARE INTENDED TO MAINTAIN REAL WAGES OVER TIME  WHILE PRODUCTIVITY ADJUSTMENTS ARE INTENDED TO INCREASE THEM

FROM TIME TO TIME IN LINE WITH THE GROWTH OF NATIONAL  PRODUCTIVITY.

IN FACT, WHILE WE HAVE HAD INDEXATION SINCE 1983 WE HAVE HAD  NO NATIONAL PRODUCTIVITY AWARD GOING TO LABOUR.

THE BENEFITS OF PRODUCTIVITY GROWTH HAVE GONE APPROPRIATELY  AND IN THE FIRST INSTANCE TO LOWERING INFLATION AND BOOSTING  PROFITS AND EMPLOYMENT.

IN VIEW OF OUR PROGRESS ON BOTH INFLATION AND PROFITS, A  PRODUCTIVITY AWARD TO LABOUR MIGHT HAVE BEEN EXPECTED IN  MID 1985, BUT THE TRADE UNION MOVEMENT AGREED THAT IN LIGHT  OF THE PRICE EFFECTS OF DEPRECIATION THERE SHOULD BE NONE.

IN RETURN, THE GOVERNMENT AGREED TO SUPPORT A 3% PRODUCTIVITY  AWARD PHASED IN OVER TWO YEARS FROM JULY 1986.

THAT YEARS DELAY IN IMPLEMENTATION AND THE TWO YEARS OF  PHASING WILL ALLOW A FURTHER REDUCTION IN COSTS ADDITIONAL TO  THE 2% DISCOUNT TO OFFSET THE INFLATIONARY INFLUENCES OF THE  DEPRECIATION.

THE PRODUCTIVITY AWARD IS TO BE PAID IN THE FORM OF  OCCUPATIONAL SUPERANNUATION INSTEAD OF DIRECT WAGE RISES - A  REFORM WHICH WILL HAVE FUNDAMENTAL LONG-TERM BENEFITS FOR OUR

SOCIAL SECURITY BILL.

THESE ARRANGEMENTS MEAN THAT THE UNAVOIDABLE EFFECTS OF  DEPRECIATION ON DOMESTIC PRICES WILL NOT BE PASSED INTO THE  DOMESTIC LABOUR COST STRUCTURE, THAT INFLATION WILL THEREFORE  DECELERATE AGAIN AFTER THE INITIAL BLIP PASSES THROUGH, AND

THAT THE BENEFITS OF THE DEPRECIATION WILL BE SUBSTANTIALLY  PRESERVED IN REAL TERMS.

AS A RESULT OF THE DEPRECIATION I ANTICIPATE THAT OUR  INFLATION RATE IN THE FINANCIAL YEAR ENDED JUNE 30 1986 WILL  RISE TO ABOUT 81.

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THAT IS OUR OBJECTIVE OF WITHDRAWING THE FISCAL STIMULUS AND  REDUCING THE PRESSURE OF PUBLIC SECTOR DEMANDS ON REAL AND  FINANCIAL RESOURCES AS THE RECOVERY PROGRESSES, AND OUR  DESIRE TO PLACE A STRICT LIMIT ON THE SIZE OF THE GOVERNMENT

SECTOR AND THE ASSOCIATED OVERALL BURDEN OF TAXATION. Â·

THAT IS IMPORTANT TO THE MORE EFFICIENT AND DYNAMIC ECONOMY  THAT WE SEEK.

THE MONTHS LEADING UP TO THE FIRST FEDERAL BUDGET OF THE  CURRENT THREE YEAR PARLIAMENTARY TERM SAW A NUMBER OF STEPS  GIVE EFFECT TO THESE FISCAL OBJECTIVES.

IN MAY THE GOVERNMENT ANNOUNCED AN INITIAL ROUND OF  REDUCTIONS IN FEDERAL BUDGET OUTLAYS TOTALLING  $1 1/4 BILLION, OR ALMOST 2% OF THE PROSPECTIVE LEVEL OF  OUTLAYS IN THE FINANCIAL YEAR BEGINNING 1 JULY 1985.

SUBSEQUENTLY, IN THE ANNUAL NEGOTIATIONS WITH THE STATES OVER  FEDERAL/STATE FINANCES FOR THE YEAR AHEAD, WE OBTAINED  AGREEMENT TO THE NEED FOR PUBLIC SECTOR RESTRAINT AT ALL  LEVELS OF GOVERNMENT.

A DEAL WAS STRUCK THAT THERE BE NO INCREASE IN REAL TERMS IN  BASIC GENERAL REVENUE GRANTS TO THE STATES, AND THAT THERE BE  A CUT OF 10% IN REAL TERMS IN STATE AUTHORITY BORROWINGS.

THESE PROCESSES CULMINATED IN THE FEDERAL BUDGET FOR 1985-86  ANNOUNCED IN AUGUST.

THE BUDGET ESTIMATES EMBODIED A SUBSTANTIAL REDUCTION IN THE  FEDERAL DEFICIT - FROM $6.7 BILLION IN 1984-85 TO  $4.9 BILLION IN 1985-86, OR FROM 3.3% OF GDP TO 2.1%.

THE TOTAL PUBLIC SECTOR BORROWING REQUIREMENT IN NET TERMS,  WHICH HAD FALLEN FROM 7.2% IN 1983-84 TO 5.7% IN 1984-85, WAS  REDUCED FURTHER TO 4.5% IN 1985-86.

FEDERAL BUDGET OUTLAYS IN REAL TERMS ARE ESTIMATED TO  INCREASE BY ONLY 1.3% IN 1985-86, DOWN FROM 6% THE PREVIOUS  YEAR.

IN SHORT, THE BUDGET ESTIMATES FOR 1985-86 EASILY MET OUR  TRILOGY COMMITMENTS.

THE DISCIPLINE THESE IMPOSED HAD NOT BEEN MET IN ANY OF THE  PREVIOUS SIXTEEN YEARS.

I AM TEMPTED TO DRAW COMPARISONS BETWEEN THESE ACHIEVEMENTS  AND FISCAL POLICY DEVELOPMENTS IN THE UNITED STATES.

A REDUCTION IN THE UNITED STATES FEDERAL DEFICIT OF THE SAME  PROPORTION OF GDP AS THAT BUDGETTED FOR AUSTRALIA IN 1985-86  WOULD BE ALMOST $US50 BILLION. .

A CUT IN YOUR DEFICIT EQUIVALENT TO WHAT WE HAVE ACHIEVED IN  TWO YEARS WOULD EQUAL ABOUT $US85 BILLION.

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THE KEY POINT IS THAT THROUGH THE DEPRECIATION, AND OUR WAGES  POLICY REACTION TO IT, AUSTRALIA'S COMPETITIVENESS HAS BEEN  RESTORED TO THE LEVEL OF THE EARLY 1970S.

THAT HOLDS THE KEY TO THE REDUCTION OF THE CURRENT ACCOUNT  DEFICIT AND, IN TIME, THE REVERSAL OF THE BUILD-UP OF  EXTERNAL DEBT.

THE IMPORTANT POINT IS THAT THE RIGHT DIRECTION HAS BEEN  STRUCK THROUGH A RANGE OF GOVERNMENT RESPONSES INCORPORATING  WAGES, FISCAL AND MONETARY POLICY.

HOWEVER, IT NEEDS TO BE UNDERSTOOD THAT THE IMPROVEMENT IN  COMPETITIVENESS WILL HAVE A DELAYED IMPACT ON THE CURRENT  ACCOUNT AND, AS A CONSEQUENCE, AN IMPACT ON THE LEVEL OF  EXTERNAL DEBT WHICH IS EVEN FURTHER DELAYED.

AS AN ILLUSTRATION, I POINT OUT THAT THE FIGURING IN OUR  AUGUST BUDGET INCORPORATED THE PROJECTION THAT OUR CURRENT  ACCOUNT DEFICIT FOR THE WHOLE OF THE 1985-86 FINANCIAL YEAR  WOULD AVERAGE 4.6% OF GDP.

THAT WOULD BE DOWN FROM THE 4.9% RECORDED THE YEAR BEFORE.

HOWEVER, THE FIGURE FOR THE WHOLE OF THE FINANCIAL YEAR  INCORPORATES A SIGNIFICANT DOWNWARD TREND DURING THE COURSE  OF THE YEAR.

AS A CONSEQUENCE, BY THE FINAL QUARTER OF 1985-86 ,  ON PRESENT  INDICATIONS WE ANTICIPATE WE WILL BE RUNNING A CURRENT  ACCOUNT DEFICIT OF THE ORDER OF 4% OF GDP.

AND THE CURRENT ACCOUNT DEFICIT SHOULD BE HEADING LOWER IN  1986-87. v .

MR CHAIRMAN, AS I FORESHADOWED EARLIER, THERE HAVE ALSO BEEN  MAJOR FISCAL POLICY CHANGES DURING THE PAST SIX MONTHS.

IN IMPLEMENTING THESE CHANGES, THE GOVERNMENT WAS MOVING TO  FULFILL ITS 1984 ELECTION COMMITMENT ON BUDGETARY RESTRAINT.

THESE COMMITMENTS WHICH HAVE BECOME KNOWN AS THE TRILOGY, ARE

.  FIRST, THAT THERE WOULD BE A REDUCTION IN THE FEDERAL

BUDGET DEFICIT IN MONEY TERMS IN THE FINANCIAL YEAR  ENDED JUNE 1986 AND AS A PROPORTION OF GROSS DOMESTIC  PRODUCT OVER THE THREE YEAR LIFE OF THE CURRENT  PARLIAMENT;

.  SECOND, THAT THERE BE NO INCREASE IN TAX REVENUE AS A

PROPORTION OF GDP IN 1985-86 AND OVER THE LIFE OF THE  PARLIAMENT; AND

. AND THIRD, THAT THERE BE A REDUCTION IN FEDERAL BUDGET  OUTLAYS AS A PROPORTION OF GDP IN 1985-86 AND OVER THE  LIFE OF THE PARLIAMENT.

THESE COMMITMENTS EMBODY IMPORTANT OBJECTIVES CONSISTENT WITH  THE GOVERNMENT'S OVERALL ECONOMIC STRATEGY.

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THE MAJOR ELEMENTS OF THE PROPOSALS ARE:

. REDUCTIONS IN RATES OF PERSONAL INCOME TAX, PARTICULARLY IN THE TOP MARGINAL RATE FROM 60% TO 49%  AND IN THE MIDDLE 46-48% RATES TO 40%:

.  A SYSTEM OF FULL IMPUTATION ON COMPANY INCOME DISTRIBUTED TO RESIDENT INDIVIDUAL SHAREHOLDERS. THIS  WILL OVERCOME THE EXISTING DOUBLE TAXATION OF DIVIDEND  INCOME WHERE IT IS TAXED ONCE AS COMPANY PROFITS AND  TAXED AGAIN AS PERSONAL INCOME. TO PUT THIS REFORM IN

INTERNATIONAL PERSPECTIVE, AT PRESENT ONLY WEST GERMANY  PROVIDES FULL IMPUTATION;

.  TO HELP DEFRAY PART OF THE COST OF THIS MEASURE, THE

COMPANY TAX RATE WILL BE RAISED FROM 46% TO 49%. AT  THAT LEVEL, IT WILL BE ALIGNED WITH THE NEW TOP  MARGINAL RATE OF PERSONAL INCOME TAX - ITSELF AN  IMPORTANT REFORM. IT WILL MEAN THAT PHONEY

CORPORATIONS AND CORPORATE STRUCTURES DESIGNED TO WALK  AROUND THE HIGH PERSONAL TAX RATES WILL NO LONGER BE''  ENCOURAGED;

.  THE INTRODUCTION OF A CAPITAL GAINS TAX BASED ON REAL

CAPITAL GAINS ON ASSETS ACQUIRED AFTER  19 SEPTEMBER 1985 .  WITH A MORE NEUTRAL TAX TREATMENT  OF INCOME AND CAPITAL GAINS, THE MISALLOCATION OF  SCARCE CAPITAL WILL BE REDUCED;

. MORE EFFECTIVE TAXATION OF FRINGE BENEFITS. A LARGE  HOLE WAS BEING PUNCHED IN THE INCOME TAX BASE BY THE  INEQUITABLE PROLIFERATION OF NON-CASH FRINGE BENEFITS:

.  A GENERAL FOREIGN TAX CREDIT SYSTEM UNDER WHICH THE FOREIGN SOURCE INCOME OF AUSTRALIAN RESIDENTS WILL BE  TAXED IN AUSTRALIA AND A CREDIT FOR FOREIGN TAX PAID  ALLOWED AGAINST AUSTRALIAN TAX PAYABLE ON THAT INCOME.  THE NEW SYSTEM WILL BE SIMILAR TO SYSTEMS OPERATED BY  THE UNITED STATES, THE UNITED KINGDOM AND WEST GERMANY.

IN ALL, THE TAX CUTS INCLUDED IN THIS REFORM PACKAGE WILL  OUTWEIGH THE ADDITIONAL REVENUE TO BE RAISED BY $1.2 BILLION  IN 1986-87 AND $3.0 BILLION IN 1987-88.

CONSISTENT WITH THE TRILOGY, NONE OF THIS REVENUE LOSS WILL  BE FINANCED BY ADDING TO THE GOVERNMENT'S DEFICIT.

THE GOVERNMENT HAS RESOLVED THAT IT WILL BE FINANCED BY THE  MOST RIGOROUS RESTRAINT ON PUBLIC SECTOR OUTLAYS.

MR CHAIRMAN, AS I FORESHADOWED EARLIER, THE GOVERNMENT HAS  RECENTLY MADE AND ANNOUNCED SOME MAJOR CHANGES TO AUSTRALIA'S  FOREIGN INVESTMENT POLICY. -

THERE REMAINS IN AUSTRALIA, I BELIEVE, BROAD SUPPORT FOR THE  VIEW THAT GOVERNMENT HAS A ROLE IN MONITORING AND EVALUATING  THE FLOW OF FOREIGN INVESTMENT.

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$US50 BILLION IS, OF COURSE, THE ORDER OF MAGNITUDE OF THE  DEFICIT REDUCTION PROPOSED FOR THE UNITED STATES FISCAL YEAR  1986, BUT THE DETAILED STEPS TO ACHIEVE THAT OBJECTIVE HERE  REMAIN ELUSIVE.

WE HAVE DONE IT.

MOREOVER, OF COURSE, THE UNITED STATES ADMINISTRATION IS  STARTING FROM A MUCH HIGHER LEVEL, WITH THE DEFICIT CURRENTLY  RUNNING AT ABOUT 5 1/2% OF GDP.

AS I MENTIONED EARLIER, AT THE SAME TIME AS THE GOVERNMENT  HAS BEEN GIVING EFFECT TO THE TRILOGY THROUGH ITS 1985-86  BUDGET, WE HAVE BEEN ASSEMBLING A MAJOR TAX REFORM PACKAGE.

IF OUR LOCAL REPORTING OF THE DEVELOPMENT OF AUSTRALIAN TAX  REFORM IS ANY GUIDE, I DOUBT WHETHER THE SCALE OF THE REFORM  ACTUALLY ANNOUNCED BY THE GOVERNMENT IS FULLY APPRECIATED BY  YOU.

YOU HAVE PROBABLY BEEN LEFT WITH THE IMPRESSION THAT BECAUSE  SOME OF THE GOVERNMENT'S WHITE PAPER PROPOSALS IN JUNE DID  NOT SURVIVE THE TAX SUMMIT IN JULY, NO WORTHWHILE REFORMS ARE  TAKING PLACE.

NOTHING COULD BE FURTHER FROM THE TRUTH.

THE TRUTH IS THAT THIS REFORM PACKAGE IS THE MOST SIGNIFICANT  AND DRAMATIC SINCE THE PROGRESSIVE INCOME TAX SCALE WAS  INTRODUCED IN THE 194OS. .

AND AS FAR AS CORPORATE TAXATION GOES IT REPRESENTS THE MOST  FUNDAMENTAL CHANGE SINCE COMPANY TAX WAS INTRODUCED.

THE REFORM PACKAGE NOT ONLY GIVES EFFECT TO OUR OBJECTIVE OF  A MORE EFFICIENT AND FAIRER TAXATION SYSTEM, BUT HAS MAJOR  IMPLICATIONS FOR THE TRILOGY AND THE RELATIVE SIZE OF THE  PUBLIC SECTOR BEYOND 1985-86.

AS A GOVERNMENT WE CONCLUDED THAT THE AUSTRALIAN TAXATION  SYSTEM HAD LOST CREDIBILITY.

A HEAVY BURDEN WAS BEING IMPOSED ON A NARROW BASE.

WEAKNESSES IN THE SYSTEM MEANT THAT A LARGE PROPORTION OF  TAXPAYERS WERE AVOIDING THE BURDEN OF TAX INTENDED BY THE  LEGISLATURE.

THE SYSTEM HAD BECOME BOTH UNFAIR AND INEFFICIENT.

IN SHORT, THE TAX SYSTEM WAS NOT CONDUCIVE TO DYNAMIC  NON-INFLATIONARY GROWTH.

AGAINST THAT BACKGROUND, WE SET ABOUT REFORMING*IT, AND THE  RESULTING CHANGES CONSTITUTE THE MOST SIGNIFICANT REFORM OF  THE AUSTRALIAN TAX SYSTEM IN LIVING MEMORY.

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THAT ACHIEVEMENT STANDS IN STARK CONTRAST TO THE RECORD OF  THE PREVIOUS 10 TO 15 YEARS, BUT TAKING A LONGER TERM  PERSPECTIVE, IS NO MORE THAN WHAT WE BECAME USED TO DURING  THE 1950s AND 1960s.

ALL EARLY INDICATORS POINT TO THE FACT THAT OUR BUDGET  FORECASTS FOR GROWTH WILL BE MET YET AGAIN.

IN STATING THAT I REJECT THE NOTION THAT CONTINUED GROWTH IS  INHERENTLY INCOMPATIBLE WITH THE CORRECTION OF EXTERNAL  IMBALANCES SUCH AS I DISCUSSED EARLIER.

IN AUSTRALIA, WE ARE CONFIDENT THAT THE POLICIES IN PLACE  WILL SEE THE EXTERNAL ACCOUNTS MOVING INTO BETTER BALANCE  WHILE GROWTH CONTINUES.

A KEY FACT OVERLOOKED BY THOSE WHO DOUBT THAT AUSTRALIA CAN  CONTINUE TO ENJOY SOLID GROWTH AT THE SAME TIME AS CORRECTING  OUR EXTERNAL IMBALANCE IS THAT IT IS NOT THE OVERALL LEVEL OF  ECONOMIC ACTIVITY THAT UNDERPINS IMPORT GROWTH - RATHER IT IS  DOMESTIC DEMAND THAT IS RELEVANT.

NON-FARM PRODUCT IS FORECAST TO GROW BY 5% THIS YEAR BUT  DOMESTIC DEMAND IS EXPECTED TO GROW BY ONLY 3%.

DEMAND IS THEREFORE EXPECTED TO SLOW QUITE MARKEDLY FROM THE  5% GROWTH RECORDED IN 1984-85 - LARGELY, I MIGHT ADD, ON  ACCOUNT OF A MUCH SMALLER INCREASE IN PUBLIC SECTOR DEMAND.

THE DIFFERENCE BETWEEN THE GROWTH IN DEMAND AND THE GROWTH IN  TOTAL ACTIVITY IS LARGELY DUE TO THE CONTRIBUTION OF THE  EXTERNAL SECTOR AS IMPORTS ARE REPLACED BY DOMESTIC  PRODUCTION.

IN OTHER WORDS, BECAUSE OF THE DEPRECIATION IN OUR CURRENCY, A MUCH GREATER SHARE OF A SOMEWHAT SMALLER INCREASE IN DEMAND  WILL THIS FINANCIAL YEAR BE MET FROM LOCAL SOURCES RATHER  THAN BY OVERSEAS PRODUCERS.

I MIGHT ADD THAT 5% ACTIVITY GROWTH SHOULD BE ACCOMPANIED BY  EMPLOYMENT GROWTH OF AROUND 2 3/41..

THIS IS GREATER THAN THE 1% OR SO LIKELY INCREASE IN  AUSTRALIA'S ECONOMICALLY ACTIVE POPULATION, SO WE ARE LOOKING  TO A FURTHER DROP IN UNEMPLOYMENT.

AS I HAVE ALREADY OUTLINED, THE GOVERNMENT HAS MADE MAJOR  POLICY ADJUSTMENTS IN 1985 .

THE FEDERAL DEFICIT HAS BEEN PULLED BACK BY OVER 1 % OF GDP  AND THE TOTAL PUBLIC SECTOR BORROWING REQUIREMENT BY MORE  THAN THAT.

AND AGREEMENT HAS BEEN REACHED WITH THE ACTU ON THE WAGE  ADJUSTMENTS REQUIRED TO PRESERVE COMPETITIVENESS.

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HOWEVER, WE REGARD OUR APPROACH TO FOREIGN INVESTMENT AS A  FLEXIBLE AND COMMONSENSE ONE.

WE WELL RECOGNISE THE IMPORTANT ROLE SUCH INVESTMENT AND  CAPITAL FLOWS PLAY IN OUR ECONOMY.

AS WELL AS CONTRIBUTING TO OUR OBJECTIVE OF ATTRACTING USEFUL  FOREIGN INVESTMENT, THE CHANGES WE HAVE RECENTLY MADE ALSO  SERVE TO CONTRIBUTE TO OUR BROADER AIM OF REDUCING REGULATION  OF BUSINESS WHERE POSSIBLE.

TAKEN TOGETHER, THEY EITHER EXEMPT FROM EXAMINATION OR  SIMPLIFY AND STREAMLINE THE EXAMINATION PROCESS FOR AROUND  ONE-THIRD OF PROPOSALS FOR INVESTMENT IN AUSTRALIA.

POSSIBLY THE MOST SIGNIFICANT OF THE CHANGES IS THE ABOLITION  OF WHAT IS KNOWN AS THE OPPORTUNITIES TEST FOR FOREIGN  INVESTORS PROPOSING TO ACQUIRE AUSTRALIAN BUSINESSES, REAL  ESTATE OR RURAL LAND.

THIS REQUIRED INVESTORS INTENDING TO MAKE SUCH A PURCHASE  FIRST TO DEMONSTRATE THAT SPECIFIC OPPORTUNITIES HAD BEEN  PROVIDED FOR AUSTRALIANS TO BID OR TO MAKE REPRESENTATIONS.

IN REALITY, THE TEST RARELY SERVED TO PRODUCE AN ALTERNATIVE  AUSTRALIAN BUYER, BUT MORE OFTEN COMPLICATED THE  IMPLEMENTATION OF PROPOSALS OR GAVE THEM PUBLICITY WHICH, FOR  COMMERCIAL REASONS, NEITHER PARTY DESIRED.

THE OTHER MAJOR CHANGES INCLUDE SIGNIFICANT INCREASES IN THE  DOLLAR THRESHOLDS FOR THE EXAMINATION OF PROPOSALS, A  REDUCTION OF REGULATIONS FOR INVESTMENT IN REAL ESTATE, A  CONTINUATION AND BROADENING OF WHAT HAD BEEN A TEMPORARY

RELAXATION OF FOREIGN INVESTMENT GUIDELINES FOR THE FINANCIAL  SECTOR AND RELAXATION OF THE POLICY REQUIREMENTS FOR FOREIGN  INVESTMENT IN THE INSURANCE SECTOR.

FOREIGN INVESTMENT HAS LONG MADE A SUBSTANTIAL CONTRIBUTION  TO THE DEVELOPMENT OF AUSTRALIA'S INDUSTRIES AND RESOURCES.

THESE CHANGES EMPHASISE THAT THE HAWKE GOVERNMENT WELCOMES  FOREIGN INVESTMENT THAT IS WORTHWHILE TO AUSTRALIA,  PARTICULARLY INVESTMENT THAT LEADS TO ADDITIONAL DEVELOPMENT  AND EMPLOYMENT.

MR CHAIRMAN, IN CONCLUSION I WISH TO REAFFIRM TO MY AUDIENCE  TONIGHT THAT THE ECONOMIC GROWTH PROSPECTS FOR AUSTRALIA THAT  I OUTLINED IN THE AUGUST BUDGET ARE WELL ON TRACK.

THE KEY FORECASTS IN THAT DOCUMENT WERE THAT WE WOULD GROW BY  5% IN THE NON-FARM ECONOMY, AND 4.5% IN THE ECONOMY AS A  WHOLE.

IN ACHIEVING THOSE RATES OF GROWTH, IT WILL BE A THIRD YEAR  IN SUCCESSION THAT AUSTRALIA HAS REGISTERED SUCH A  PERFORMANCE.

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MONETARY POLICY HAS ALSO BEEN TIGHTENED SIGNIFICANTLY.

AS IN MANY OTHER COUNTRIES, INCLUDING THE UNITED STATES, WE  IN AUSTRALIA HAVE HAD TO MOVE THE EMPHASIS AWAY FROM MONETARY  TARGETING IN THE FORMULATION AND EXECUTION OF MONETARY POLICY.

THE REASONS WILL BE FAMILIAR TO YOU - DEREGULATION AND  INNOVATION IN FINANCIAL MARKETS HAVE DISTORTED THE  RELATIONSHIP BETWEEN NOMINAL INCOME AND MEASURED GROWTH RATES  OF MONETARY AGGREGATES.

BUT THIS DOES NOT MEAN THAT WE HAVE DOWNGRADED THE IMPORTANCE  OF MONETARY POLICY IN THE OVERALL POLICY ARMOURY.

RATHER, IN POLICY FORMULATION AND IMPLEMENTATION, AS WELL AS  IN INTERPRETATION OF MONETARY CONDITIONS, WE ARE GUIDED BY A .   COMPREHENSIVE "CHECKLIST" OF FINANCIAL INDICATORS AND  ECONOMIC DEVELOPMENTS.

OUR READING OF THESE INDICATORS SUGGESTS THAT MONETARY  CONDITIONS AND POLICY IN AUSTRALIA ARE PRESENTLY VERY FIRM.

THIS INTERPRETATION IS WIDELY ACCEPTED.

IT IS APPROPRIATE THAT MONETARY CONDITIONS BE FIRM, SO AS TO  HELP ENSURE THAT THE PACE OF ECONOMIC EXPANSION DOES NOT  BECOME SO STRONG AS TO ENDANGER ITS SUSTAINABILITY.

FINALLY I STRESS THAT AUSTRALIA IS NOT ENGAGED IN ANY SIMPLE  MINDED DASH FOR UNSUSTAINABLY RAPID GROWTH.

THE HAWKE GOVERNMENT'S TAX AND FINANCIAL MARKET REFORMS AND  ITS FISCAL TRILOGY ARE CLEARLY GEARED TO THE LONGER TERM.

THEY ARE FUNDAMENTAL CHANGES THAT WILL CONTINUE AS SOURCES OF  INCREASED EFFICIENCY AND DYNAMISM IN THE AUSTRALIAN ECONOMY.

THE DEPRECIATION INDUCED ENHANCEMENT OF OUR INTERNATIONAL  COMPETITIVENESS IS ALSO HERE TO STAY.

WE ARE VERY CONSCIOUS THAT GROWTH MUST PROCEED ON A  SUSTAINABLE BASIS.

BUT WE ARE CONFIDENT THAT THE POLICY MIX WE HAVE IN PLACE AT  THE MOMENT WILL ENSURE THAT WILL BE THE CASE.

THANK YOU FOR THIS OPPORTUNITY TO SPEAK TO YOU A SECOND TIME  THIS YEAR.

