John Howard's Speech to Australian Merchant Bankers' Association Melbourne 22
Published by Victor Perton as part of Australian Liberalism: The Continuing Vision
Liberalism (A Resource of Liberal Materials from around the world including definitions of Liberalism)
...At the end of last year, a significant move toward deregulation of the banking system was made when interest rate ceilings on deposits of both savings banks and trading banks were removed. The circumstances which prompted that particular change continue to serve as a useful example of how well intended regulation of financial institutions can produce not only distorting effects on the economy, but also perverse ones.
Another easing in regulatory procedures came with the change in operation of capital inflow surveillance which eliminated the delays often experienced in the past when funds were brought into Australia. Another was the Reserve Bank's announcement that it would be prepared to consider on a case by case basis increases in the proportion of banks' share holdings in money market corporations.
A questioning of the extent of government involve- ment in the financial system was behind the endorse- ment of the proposed private industry-cased deposit insurance scheme for permanent building societies. It was also behind the Government's intention to sell the assets and business of the Housing Loans Insurance Corporation.
In the context of the banking structure, the emergence of the Australian Bank was a very welcome and exciting event. Of course the other fundamental changes were the recently approved bank mergers.
At the time of the establishment of the Campbell Committee, I said that the objective of the inquiry was not more regulation by the Government. Indeed, I said that one of the important issues to be canvassed by the inquiry would be whether present levels of regulation and government involvement were appropriate.
I think the changes already made to the financial system that I have just listed - and I might say that some of them did nothing to increase the popularity of the Government - should suggest well enough the Government's responsiveness to the need for change its will to improve the efficiency of the financial system and its interest in examining the extent of involvement of government in the financial system.
A contemporary example of the value of less government intervention in the financial system is provided by the current debate on the possibility of a so- called credit squeeze. That it is possible to dismiss with conviction the present talk of a credit squeeze as misinformed and ill-founded owes much to the fact that we have an infinitely freer and more flexible financial system than even just a few years ago.
If, for example, the Government had maintained the embargo on short term borrowings the system would not have self adjusted so easily to the changed liquidity needs of the past six to twelve months. More to the point, if the Government had listened to those who argued for the reimposition of selective capital controls in the wake of the huge influx of capital earlier this year, we may well have faced some of the problems to which those same people are now erroneously point- ing.
...The commissioning of a report of this nature is recognition by the Government that it not only has a responsibility for good day to day economic manage- ment, but it also has a responsibility to reform, to innovate and to make decisions of a long term character. This inquiry would never have been estab- lished if the Government had not believed there was need for fundamental change and reform to the system.
...Another area in which the Government is facing some far-reaching decisions is that of industry protec- tion. Perhaps sharper divisions of opinion exist in this area than in any other. The Government will soon be required to respond to the Industries Assistance Commission's report on the motor vehicle industry.
Further down the track decisions will have to be made in response to recent general references to the IAC As with many of the issues in the financial system, there are implications of these decisions which cannot be fully quantified and cannot be fully foreseen.
Nonetheless, the Government has the task of balanc- ing long term implications on inflation and interest rates, the exchange rate, and the balance of payments, with shorter term implications. These include indus- trial structure and employment - particularly regional - and business confidence.
We want to ensure that those activities which offer the greatest advantages in terms of efficiency and competitiveness are accorded the highest priority. This means ensuring that the most efficient industries will have ready access to the resources they need, consist- ent with other objectives such as the need to contain inflation. To achieve this room for the most efficient indus- tries, we have to be prepared to contain expenditure and the use of real resources in other areas. These guiding principles are perfectly clear. Furthermore some reduction in protection at the present time would reduce our need to rely quite so heavily on other policy areas particularly monetary policy.
An audience such as this needs no reminding that interest rates in Australia at the present time are at extremely high levels. There are also some valid social and economic concerns which must be balanced against the apparent advantages of reduced protection. Adverse effects on employment and on business confidence must be given recognition and importance.
Finally the protection debate is further complicated by the fact that views differ markedly across the nation according to the relevant strength of different indus- trial sectors in different parts of Australia.
The challenge to find a better system of industrial relations and wage determination has been with us for some time. At present we face the particular challenge of adjusting to the decision of the Conciliation and Arbitration Commission to abandon automatic wage indexation. In a sense all of us, employers, unions, and governments alike have entered some unchartered waters on this issue.
Overall I believe strongly that the Commission's decision was a sensible and appropriate one. Wage indexation served a useful purpose in its initial years, but, with the passage of time, became steadily less appropriate to our circumstances. We need to find a better system for determining wages and for sharing the gains of economic activity.
A 'system' of sorts has quickly taken the place of wage indexation. It is a system which has many of the characteristics of decentralised wage determination. Individual unions have been lodging wage claims and, in many cases, negotiating with individual employers. Although the arbitral tribunals are still very much involved, they are dealing with awards individually rather than on a collective basis as in national wage cases.
I believe that this move towards greater decentralisation and flexibility is appropriate. It is more likely to produce wage outcomes that are in sympathy with the needs of the economy. In the post indexation period, it is appropriate that governments should involve themselves less in the detail of individual wage cases and negotiations.
It is important for all of us to recognise that, in the end, real increases in earnings are determined not by the process of wage determination itself, but by economic and labour market conditions. In this context the Government's best contribution is to step back and encourage those whose interests are directly at stake to be accountable for their actions. This is an approach we have adopted in regard to fiscal relations with the States, and we regard it as the only long term means of ensuring responsible action.
However, the Government does have a direct responsibility for wage determination as an employer. It also has an overriding responsibility to set the monetary, fiscal and other policies in place which will achieve overall economic objectives, including wage restraint.
However, it should be clear that unless the emerging wage arrangements produce the appropriate degree of wage restraint, monetary and fiscal policies will need to carry more of the burden within the context of our overall anti- inflationary strategy.
...One area of policy I have not mentioned - that relating to foreign investment - represents to me an outstanding example of the achievement of that balance. Clearly a large country, with a small domestic savings base, which is seeking to develop natural resources on a large scale needs funds from overseas. Thus there is a strong case on economic grounds alone for foreign capital to move as freely as possible into Australia in response to market forces and for those funds to be allocated without impediment into areas of greatest development potential. Such investment undoubtedly brings the benefits of increased demand for labour and domestic goods, an expanded tax base and ultimately higher living standards.
Against this, however, the Government has had to balance the very proper desire of the Australian people to own and control a reasonable share of this nation's resources and industries. The motives behind this desire are a rather complex mixture of rather economic considerations as well as strongly held views of a social and political kind.
This area is a classic example of where a failure to strike the appropriate balance would deny to Australia the long-term benefits of overseas investment and indeed put at risk the orderly and sensible development of the resources of this country.
Speech to Australian Merchant Bankers' Association Melbourne 22 October 1981
This page produced by Mark Webster at the request
of Victor Perton
Re-edited 30 May 2000
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