The Press SATURDAY, MARCH 17, 1956. Australia’s Economy

Press, Volume XCIII, Issue 27920, 17 March 1956, Page 8

The Press SATURDAY, MARCH 17, 1956. Australia’s Economy

The financial measures announced by Mr Menzies have two main cbjects. The first is to provide additional revenue to avoid an estimated cash deficit of “at least “ £30,000,000 ” in the Government j account at June 30 (the end of the Australian financial year). This, it may be judged, is the main purpose of the sharp tax increases on petrol, cigarettes, beer, and spirits, which will yield immediate revenue. The second object is to wring some of the inflation out of the Australian economy; and the increases in sales tax are among the chief means to this end. The Federal Government’s heavy deficit is largely the result of the failure of the internal loan market to supply sufficient funds for public works, which itself is an indication of serious inflation. The new steps announced by Mr Menzies are the third instalment of special financial measures (in addition to the Budget) taken in the last year to adjust the unbalanced Australian economy. Last April import quotas were reduced to protect the balance of payments. In September, imports were further restricted, and instructions were given to the banks to reduce theiilending. But the balance of payments showed no noticeable improvement. For some months, overseas balances have been ominously near the £300,000,000 mark, which in Australia is regarded as the danger point Australia has had a run of bad luck. The price of wool, which normally accounts for about half the nation’s export earnings, has fallen in the present season;-and foreign exchange earnings from the second most important export, wheat, have also fallen off. The long dock strike at the height of the shipping season for staple exports came when the nation’s reserves were at a low ebb. But difficulties over exports do not account for the whole of the balance-of-payments trouble. Import controls failed to prevent a substantial rise in the cost of imports. There is no mystery about the cause of Australia’s difficulties. Australian industry has been expanding at a remarkable pace. The rate of national investment has been equal to the highest in the world. Australia has not borrowed largely abroad, but has maintained its high rate of investment chiefly on the export earnings from primary production. But Australia’s own production has not increased fast enough to accommodate the heavy claims on the national resources of the mass of new industries and their resultant high employment. As the “ Financial Times ” has observed, the real problem lies in the behaviour of the Australian consumer, whose claims have not been adjusted to make room for a continued expansion of capital investment at Australia’s terrific pace. Mr Menzies’s new measures are intended to discipline the consumer in several ways. Sales tax on luxury goods such as jewellery and gramophone records is sharply increased. But the most important effort to damp dowfl consumer demand is seen in the increase from 16 2-3 per cent, to 30 per cent, in sales tax on private motor-cars. This measure will be regarded by many, no doubt, as a serious blow at Australia’s fast-expanding motorvehicle manufacturing industry. Mr Menzies met criticism in advance by saying that, in effect, the industry is taking off more than its fair share of the cream of available capital and labour.

Mr Menzies said that motorvehicles, representing “the bulk in “ value ” of hire-purchase transactions, have generated a “ vast “ capital demand inside Australia. ”. This is caused by an unusual set of circumstances. Less than one-third of all the purchases of new cars in Australia in recent years have had the assistance of hire-purchase. Thus, hire-purchase does not carry an inordinate share of the blame for straining productive sources or for swelling extravagantly the import bill. But there has been extensive business in hire-purchase of second-hand cars. These transactions, and hire-purchase transactions for the more expensive domestic goods such as refrigerators and washing machines, have been financed by credit houses. The growth of these credit houses to a position of formidable importance in the Australian credit structure has been helped by a curious anomaly. Whereas the permissible overdraft rates for banks is controlled by the Federal Government through the Commonwealth Bank, hire-purchase houses are under the control of State Governments, which have refused the Federal Government the power it has sought to supervise such businesses. Having complete freedom with interest rates, the hire-purchase houses have, in practice, created a money market in Australia. They have obtained money from the public on terms that have appealed strongly to holders of liquid funds, with two important effects. Heavy inroads have been

made in the markets for loan money; and because hire-purchase can be financed without recourse to the banks, the power of the banks to damp down the excessive growth of purchasing power has been considerably neutralised. It is this position that Mr Menzies is trying to meet by increasing the permissible overdraft rate for the banks from 5 per cent, to a maximum of 6 per cent. The banks argue that when their charge for advances is low, the rates they can pay for deposits must be fixed at levels much lower than finance houses can offer. The increase in overdraft rates should improve the competitive power of the banks to bid for available liquid funds; but it remains to be seen whether this form of economic trouble will also need, by consent of the States, some supervisory authority over the houses dealing in hire-purchase finance.

Mr Menzies’s measures will probably be criticised on the grounds that more fundamental action than a mere damping down of demand is necessary to remedy the grosser ills in Australia’s economy. For instance, the wage-fixing machinery (which at a stroke could wipe out improvements made by fiscal measures and monetary discipline) calls for close attention; and the inflationary influences associated with the huge immigration programme are giving much food for thought. On the other hand, Mr Menzies is entitled to expect that, as time passes, the nation’s investments in capital construction will increasingly yield returns in the form of higher production. A rapidly expanding industrial economy such as Australia’s, developing side by side with a growing primary economy, necessarily exposes the country to certain economic dangers, which must be accepted and faced. Mr Menzies’s stern dose of antiinflationary medicine shows that he is determined to avoid exposing the patient to too many risks.