AUSTRALIA’S ECONOMY TOUGH BUDGET FORECAST BY FEDERAL TREASURER

Press, Volume CXI, Issue 32636, 18 June 1971, Page 8

AUSTRALIA’S ECONOMY TOUGH BUDGET FORECAST BY FEDERAL TREASURER

(By

MICHAEL SOUTHERN.

Australian correspondent of the "Financial Times,” London)

(Reprinted from the "Financial Times” by arrangement)

The Australian Treasurer, Mr Snedden, recently announced that there was going to be a tough Budget in August. This announcement has since been approved by the Prime Minister, Mr McMahon, who says he is quite happy to let Mr Snedden conduct his own public relations campaign leading up to the Budget. The effects of this, and a later speech by Mr Snedden, has been to bring about a downturn in business confidence. The stock exchanges were marked down considerably as a result of the statement, and have not really recovered.

After the relative stability of the 1960 s when the average annual rise in the consumer price index was just under 2.5 per cent, the annual rate reached 7.6 per cent towards the end of last year. There were some special factors, mostly due to the indirect taxation imposed in Mr Leslie Bury’s first and last budget. But the December figures did not include the effects of a 6 per cent all-round wage rise given by the Conciliation and Arbitration Commission at the end of last year, a rise much higher than expected which threw all of the finely balanced budgetary considerations of last year into total confusion.

That 6 per cent was not the end of the wage rises, but simply another instalment. Teachers, for example, received a 14 per cent rise before the 6 per cent, which was added on. Journalists have since received substantial rises which in some cases amount to almost 25 per cent when the 6 per cent is included. These are not isolated instances. In 1970, the average wage rise was 8.2 per cent and in the current year it will be much higher.

Government restraints Faced with cost-push inflation, the Commonwealth Government stopped recruiting civil servants and cut its own expenditure. It has sought a voluntary pause in investment in non-residential buildings, though this particular situation is in the process of being resolved by the laws of supply and demand, since over-building in both Sydney and Melbourne is like to produce a surplus of empty office blocks.

The Government argues that the inflationary spiral has to be stopped. It has already made disapproving noises about over-generous

wage settlements and complained bitterly about the arbitration decision. The Prime Minister has argued openly that Australia cannot live with this inflation rate (it has now settled somewhere above 5 per cent, probably close to 6 per cent) as it is affecting the ability of indus- . try to compete in the world markets. At the same time, the Government has shown no sign of intending to reintroduce the special 20 per cent investment allowance for installation of new industrial plant Interest rates have been kept high by Australian standards, indeed so high i that there has been a strong flow of foreign capital into

the countiy, partly because Australian institutions are turning more and more to Europe for their loans. Budget surplus On the other hand, both Mr Snedden and the Prime Minister have in recent weeks stated just how strong the economy is. There will be a budget surplus of $A36Om this year. The balance-of-pay-ments situation is favourable. In the 10 months to the end of April exports were running at a record level of $A35B9m and imports stood at $A3465m and this included $A45m in Phantom jets on lease from the United States. During 1970, Australia’s international reserves rose by more than $A3OOm. Gross national product was up by 12 per cent in the March quarter of this year, and for the first three-quar-ters of the year (to the end of March) G.N.P. stood at $A22,347m. The interesting point in the G.N.P. figures is the further decline in the share of farming. It stands now at $Al649m, against $A20,698m for the non-farm sector.

The most immediate problem is not therefore inflation; nor do Mr Snedden’s arguments in favour of a tough budget appear too strong. Tne most likely explanation is that Mr Snedden is proposing to tax the non-fanning sector heavily in order to increase subsidies to rural industries to keep them alive. The purpose of the statements is as an early warning to the rural sector where the basic problems of the Australian economy lie. Values drop

The 1969-70, exports from rural industries totalled $A2lO7m, about half of total exports. But they have dropped by $Al9Bm to $Al929m for 1970-71, in spite of an increase in the over-all volume of sales. Rural production in Australia has been increasing at a rate 'of 3 per cent a year over the last

decade, and consumption has been increasing by only 2 per cent. This has emphasised the reliance of the country on its export markets. More than 95 per cent of the wool clip is exported; so is 70 per cent of the wheat, sugar and dried fruits, and 50 per cent of the beef produced. Farm income in 1970-71 has been estimated to be close to $AB9Om a drop of $Al6Om on last year which made it the lowest in real terms since the end of the war. At the same time, rural indebtedness has been rising, and the gross debt to major institutions is about $A2O95m. There are few farmers in a position to service their debts.

The wool industry is suffering the most. It is talked about today as a crisis industry, and the question is how much longer it can last before becoming a disaster industry. Wool industry’s debt The outstanding debt of the wool industry is estimated by the Minister for Primary Industry, Mr lan Sinclair, at $Al2OOm, four times net farm income. In 1966-67 the debt was $A9BOm, one and a third times net farm income. Capital values have been declining while production has been increasing. In the current year, the production estimate is 1994 m lb, the second highest on record and only 2.5 per cent under last year. As a contributor to export earnings, wool is- still the major single earner. According to estimates for the current year wool contributes 18 per cent of total exports or $A5B3m. compared to $AB24m last year. Already there is widespread aid to the industry in the form of direct grants and taxation concessions. There was an emergency $A3Om recently, in addition to an agreement to provide $AlOOm over four years for urgently needed rural reconstruction.

In a study of the wool industry, the Bureau of Agricultural Economics in Canberra discovered that at the end of the 10-year period to 1966-67, 6 per cent of properties in the pastoral and wheat-sheep zones, and 11 per cent in the high rainfall zones had incomes of less than SA2OOO each year. But a further 30 per cent in the pastoral zones, 50 per cent in the wheat-sheep zone and 48 per cent in the high rainfall zones had less than SA2OOO in five to nine of those years. No later official figures are available, but it is widely accepted that these percentages are higher today. There lies Mr Snedden’s toughest politico-economic problem.