How others see our performance

Press, 2 September 1983, Page 12

How others see our performance

From

the “Economist,”

London

Populist governments in Australia and New Zealand are trying to buy economic growth and electoral support with high public spending. The Labour Government under Mr Bob Hawke, Australia’s Prime Minister, announced an expansionary budget on August 23. In New Zealand the conservative Prime Minister, Mr Robert Muldoon, who froze prices and wages last year, is telling banks to lower their interest rates to help him finance his Government’s big deficit. Neither country seems likely to grow much this year. The Budget presented to the Australian Parliament last month by Mr Paul Keating, the Federal Treasurer, promises to widen the Government’s deficit to 4.7 per cent of gross domestic product this year from 2.8 per cent in 1982-83. Public spending will go up in real terms by 7.2 per cent to 31.6 per cent of G.N.P. (versus 30.4 per cent in 1982-83), while revenues will increase by only 0.6 per cent. The Government predicts that this will help Australia to grow by 3 per cent this year after last year’s 0.1 per cent. For a country as rich as Australia that is a long way below potential, and too little to bring down unemployment. Though Ministers are loth to admit it, the main aim of the new Budget is to brace their rickety wages deal with the trade unions. This conceded indexation of wages in return for a commitment by unions not to ask for more.

Last year, higher wages stopped Australia’s inflation rate following the rest of the rich world’s downwards, making its exports uncompetitive and helping to increase unemployment to more than 10 per cent of the workforce. The Government hopes that the higher spending on welfare and public works in the Budget will persuade unions to keep their side of the bargain. This may prove wishful thinking. In September, the arbitration commission must rule on whether formal wage indexation should be introduced. The powerful building workers’ union has already won a deal with employers to raise wages by more than inflation. For tips on ways to rig its economic policies, Australia could look to New Zealand, where the conservative Mr Muldoon is trying to order the economy by Government fiat. In June, 1982, Mr Muldoon imposed a freeze on wages, prices and rents to suppress inflation, which was running at 17 per cent in the previous 12 months. The policy seemed to work: inflation in the 12 months to June, 1983, tumbled to 8.3 per cent and is forecast to fall further. But interest rates stayed high, largely because the budget deficit has widened to a record ?NZ3.2 billion in 1983-84. The deficit was partly financed with a special stock issue called K.I.S.S. — the Kiwi savings stock.

This netted more than ?NZI billion between March and June at interest rates of 13-15 per cent. Financial institutions grumbled about K. 1.5.5., but worse for them was to come. When interest rates fell in July, Mr Muldoon proclaimed that the rates were not coming down fast enough and immediately dropped interest rates on Government stock from 14 per cent to 8 per cent. In a speech to bankers on July 27 he gave his audience indigestion by warning that banks had better lower their interest rates or he would be forced to regulate them. Since then, financial institutions have been waiting for Mr Muldoon’s next move. Privately, many say that if rates stick at Muldoon’s level the Government will be

unable to finance its deficit, so the Prime Minister will eventually have to give way. One bank recently advertised SNZIO million of loans for business at low interest rates and advised borrowers to “act now, before interest rates are pushed up again.” But they may not be pushed up. New Zealand’s industry is in such a poor state that there is little demand from industry for finance.

Though export prices have already increased enough to narrow New Zealand’s forecast overseas current-account deficit to about ?NZI billion for 1983, recovery elsewhere in the world may do little for New Zealand. The O.E.C.D. expects it to suffer a Vz per cent fall in G.D.P. this year

and to grow by a mere M per cent in 1984.

Even that growth could, paradoxically, create more problems than it solves for Mr Muldoon. His wage and price freeze is due to expire at the end of February, 1984. If the economy looks healthier then, unions and firms may push for higher wages and prices and restoke inflation.

So far, Mr Muldoon has kept quiet about what will happen when the freeze ends. One reason for this untypical reticence is that Mr Muldoon faces an election before November, 1984, and his political prospects look pretty bleak. Unemployment has risen rapidly from 5.3 per cent of the workforce in 1982 to 6.8 per cent. Copyright — the “Economist.”