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May/June 2000 Newsletter

The Institute for Private Enterprise promotes the cause of private enterprise and a reduction in the role of government. Subscribers receive copies of all publications including a monthly newsletter complete with attachments.




My apologies again to subscribers for the lateness of this newsletter. In fact, double apologies because there will be no letter for June as I will be overseas until late July doing the rounds of international think-tanks, treasuries and central banks. The last month has, however, been even busier than April.




I have continued to assist former Aboriginal Affairs Minister, Peter Howson, in his rather lonely task of trying to get across the truth about the "stolen generation" and other aspects of policies towards Aborigines. By one measure - numbers of articles published (sample attached, more are on IPE web site - - Peter has had considerable coverage, but it has been puny relative to the extraordinary space given to the other side. It has also had to combat what must have been and (continues to be) the most one- sided editorial campaign ever by Australia's media and, with one or two noble exceptions, by commentators in the press, radio and TV. The only editorial commentator that actually supported the Prime Minister's refusal to apologise has, ironically, come from the Asian Wall St Journal (copy attached).


This media campaign is the more extraordinary given that the opinion polls suggest that the community is pretty evenly divided on issues other than the motherhood one of reconciliation, which most people want to see happen even though they have little idea what it means or what it would involve. (In fact, the latest Newspoll shows that more are against making an apology than are for it). It is symbolic that the even division of opinion brought a complaint from The Australian's political correspondent that half of Australia is "deeply conservative", and the Sydney Morning Herald's that Australia is "full of John Howard's"!


The general line of these media commentators is that the community would be more supportive of an apology if Howard were not so opposed. But what would the position be if the media itself (1) was not so supportive, and (2) actually went to the trouble of informing the community about the main facts?


Take the stolen generation issue, where Peter Howson has been accused of "quibbling", even dishonesty. Consider the following indisputable facts which have emerged from the three cases testing compensation claims by Aborigines but to which media commentators (again with one or two exceptions) have not given any coverage and of which some do not even seem to be aware:


First, the judge in the New South Wales compensation test case found that the claimant was not "stolen" and concluded that "At all points, the whole of the evidence seems to be against the plaintiff's claim." Yet the Wilson report described the claimant as a "typical" stolen child and she was presumably chosen for the case because it was thought she had the best chance of success in NSW.


Second, in the two test cases relating to the Northern Territory (which is the only area relevant to policy of the Commonwealth Government for the period covered by the Wilson report), sworn evidence which was unchallenged by the claimants' counsel showed that:


  • For the period 1946-62 in the Territory, half-caste children numbered between 500 and 1000. Only 129 of such children were placed in hostels by the Government and all except three were placed with the mother's consent (in those three cases it was not possible to ascertain whether consent had been given). Such consent was obtained from discussions that typically extended over 18 months to 2 years.


  • For the same 1946-62 period, about 450 children were placed in hostels by parents at their own expense (reflecting the general enthusiasm shown by Aboriginal parents to obtain western education for their children). It emerged during the cases that some who believed that they were "stolen" were unaware that they had been placed in hostels by their parents.


This and other factual evidence surely undermine the credibility of the claim in the Wilson report that "nationally we can conclude with confidence that between one in three and one in ten indigenous children were forcibly removed from their families and communities in the period from approximately 1910 until 1970", let alone the absurd claim that it constituted genocide. In reality, the Commonwealth was pursuing a policy of protection against discrimination arising from the cultural rejection of many half-caste children by traditional Aboriginal communities. 


Such evidence is reinforced when one reads accounts of those who were involved in the administration of the Commonwealth policy of the time, but who were not called by Wilson to give evidence to his inquiry. The following quotation from the book written by Patrol Officer Colin Macleod on his experiences in the Northern Territory in the 1950s (based on letters he wrote to his mother at the time) provides the context:


Many children were assessed …and were judged to be better off staying where they were. Many, also, were not… Never, however, were children taken from families with a mother and father. They were always from very young and unprotected single mothers, often between 10 and 13, with no family member to properly care for them. On the occasions that I recommended the removal of children from their families, it appeared that the alternatives were pretty shocking.


Apart never letting the facts get in the way of a good story, the refusal by the greater part of the Australian media to acknowledge such evidence can only be explained as reflecting the post-modernist belief that our Western culture is something for which we have to be ashamed. A classic example of this myth, and the associated myth that primitive cultures created a Garden of Eden, is found in the following letter to "The Australian" (17.5.00) by Dr John M Reid, a cognitive neuro-scientist, who concluded thus:


 "We should also remember that before our ancestors annexed their country, the Aboriginal peoples were happy, healthy and wise enough to maintain Australia in a sustainable, homoeostatic floral and faunal state. While we have been forcing many Aborigines into a state of civilised degradation, at the same time, we have been destroying a large area of native Australia" (my emphasis).


This important cultural issue is explored further in Peter Howson's submission to the Senate "Inquiry Into the Stolen Generation", which I also helped draft. The submission is available on the IPE web site (


Some people, particularly in the business community, are inclined to brush all this aside in the interests of "getting on with life". But the idea that an apology would allow that to happen is very seriously mistaken. An apology would enhance the focus on "past injustices" and create further division, instead of focussing attention on the need to reform the disastrous strategy of encouraging separate development. New Zealand experience suggests that there is endless potential for discovering "past injustices", which are essentially in the eye of the beholder.




Subscribers will recall I have previously pointed out that, contrary to the rather superficial analyses by most media commentators, there has been a slowing in the underlying trend in the economy since early 1999 and that the much-larger-than-normal increase in inventories in the first three quarters of that year presaged a further slowing. While we do not yet have the full March quarter national accounts, partial indicators suggest there was indeed a further slowing in that quarter, due partly to falling inventories. Moreover, although underlying measures of inflation have edged up, they have remained well within the Reserve Bank's target of 2-3 per cent pa and increases in wage costs have shown a steady trend that has suggested no upwards pressure on prices from that quarter once allowance is made for productivity growth.


Despite the absence of inflationary pressures, over the past seven months the Reserve Bank has tightened monetary policy on four occasions, raising cash rates by 125 basis points to 6 per cent.  As there is a lag of 12-18 months before such increases impact on economic activity, we are yet to feel the effects of this tightening. The lag is also the operative reason for the increases - that is, the Bank has judged that, without these increases, there would be a risk of excessive inflation in 12-18 months time.


However, many commentators suggested that the increases were also required to "catch-up" with the Federal Reserve rate of 6 per cent, the implication being that Australia has to have the same rates as the US because we run a large current account deficit and the $A would come under pressure (and has in fact been depreciating). This led me to write an article for the AFR (attached) arguing that Australia can run an independent monetary policy provided it is pursuing "responsible" budgetary and monetary policies, which  (broadly) the Government now is. However, many media commentators continue to write as though the Bank has to "protect" the $A.


At a Canberra Economic Society forum to which I was invited to speak, I repeated my argument that we can run an independent monetary policy (and it was not challenged). I also argued that, in an economy that is markedly less inflation-prone and more conducive to growth compared to the 1980s, we need to be careful not to weight the balance of risks against growth and to allow, in particular, for the possibility that other "one-off" price increases similar to the GST may not require a tightening in policy.  I further suggested that, given the important role of the Bank's forward assessment of inflation in policy decisions, it has a responsibility to make clearer assessments that provide forecasts (rather than "projections") of inflation and analyses of other factors taken into account, as well as publishing an analysis of the factors that are or may be taken into account in calculating the "underlying" inflation rate used in trying to keep within the 2-3 per cent target. A copy of my address is on the IPE web site and is available on request.


The Bank's representative at the forum responded that in the 1990s monetary policy was successful in testing the limits to growth (as reflected in growth that has been both above trend and much less susceptible to fluctuation), that forecasts per se are not central to policy decisions but that it already publishes both forecasts and three measures of "underlying" inflation. A Bank Board member in the audience argued that, to maintain credibility, the Bank would always have to publish a forecasts showing inflation within the 2-3 per cent target. I agreed that the Bank has performed well to date but argued that it has done so in circumstances where the economy has been operating well below capacity and that, as it is now becoming more important and more difficult to make the right calls, there is a need for greater transparency of decision-making.


Subsequent exchanges with the Bank's representative, in which he pointed out that the Bank's formal target actually relates to the CPI as published, have left me somewhat confused as to what factors are being taken into account in assessing the underlying or ongoing trend of inflation for policy purposes. He agrees that there is a need to clarify the situation. 




Former Deputy President of the AIRC, Professor Keith Hancock, responded to my offer to make a presentation to the South Australian branch of the Economic Society on labour market deregulation by offering to debate me. Copies of both papers, presented on 30 May, are on the IPE web site.


From his paper, it appeared that Hancock's main argument for having third party intervention in employer-employee relations is to offset the alleged imbalance in bargaining power between employers and employees. Thus, although he concedes that not enough account has been taken of the competition constraint that employers face, he argues that "there remain instances where employers can exert significant bargaining power", and he refers specifically to companies such as CRA (which no longer exists!), BHP, Telstra, Patricks Stevedores and Qantas. He also asserted that "the notion of negotiation at the point of hiring is, in most instances, nonsense."


I responded by pointing out that these large companies have plenty of competitors to which their employees can turn if they are not treated properly and that the companies need to have a cooperative work-force to operate successfully. I also suggested that negotiation does occur at the point of hiring, instancing the housing industry where "subbies" continually negotiate terms with builders.


During the discussion time, Hancock indicated that, in fact, his principal reason for opposing deregulation is that a deregulated labour market would "not produce the results that we want to get" - by which he appeared to mean that it would result in greater inequality of earnings, as in the US. In essence, the alleged problem is that it would create an under-class of "working poor."


I pointed that most assessments of US inequality are not only inaccurate reflections of relative living standards, but do not allow for movement up the income scale over time. Further, on the most commonly used (albeit defective) measure of "poverty", Australia already has a substantial proportion of "working poor". I noted that, as the US has much larger ethnic minority groups with relative low literacy and numeracy (and hence lower employability) its high employment rate makes the performance of its labour market all the more remarkable. I also referred Hancock to my article on the performance of the US labour market in the Australian Bulletin of Labour for March 1999 (also on the IPE web site).


Although his paper itself has nothing to say on the subject, Hancock's presentation also conceded that I am correct in pointing out that the Australian system has not been successful in the objective of preventing and settling industrial disputes, which was the original justification for its establishment. He also agreed "95%" with my argument that, with the responsibility for controlling inflation now clearly with the Reserve Bank, there is no basis for arguing that a centralised wages system is needed to prevent wage "surges". This is a concession worth noting considering that another former member of the Commission (and also economics professor), Joe Isaac, argued in 1986 that the only ground for having a centralised system in Australia is to prevent such surges.   




The I/R policies announced by Opposition Leader, Kim Beazley, on 31 May, and the rejection by both Labor and the Democrats of the Government's legislative attempts to provide reasonable protection to employers against union intimidation, provide the go-ahead to unions to continue with the aggressive tactics they have been allowed to get away with by the industrial tribunals and the Federal Court. As suggested in my article in the AFR (attached), this poses a potentially serious threat to economic stability.


The potential for the industrial relations situation to deteriorate is even worse than painted there because of the measures taken or proposed by State Labor Governments in Queensland and NSW to increase the scope for third party intervention by State tribunals. The attempt to bring independent contractors within the "system" is particularly worrying. The Inquiry in Victoria will likely lead to more interventionism in that State too. 


One of the remarkable aspects of the Beazley line is that he wants to increase the powers of institutions to intervene in employers' decision-making about employment and in the same breath says that he wants Australia to be a "knowledge" nation. He apparently sees no contradiction between the risk-taking that is required for the latter and the deterrent effects on such risk-taking from having institutional arrangements for regulating employer-employee relations that are already unique in the world in their interventionism and discouragement to entrepreneurial activity and, hence, employment. At the margin, such interventionism has a significant effect on an employer's decisions on whether to invest and employ - and it is the marginal decisions that are important in determining whether we have low or high unemployment.


The arguments made by Beazley to support his proposals are pathetically weak. One seems to be to improve job security - but there is clear evidence that even the perception of job security has not changed since the early 1970s.  Another seems to be to deal with industrial disputes - but industrial disputes have fallen under the present Government and, in any event, the Commission has a bad track record in preventing disputes.


B also wants to improve fairness in negotiations. This is the old myth that there is an imbalance of bargaining power between employers and employees that needs to be offset by having awards and unions with quasi-monopoly powers to protect workers. But let us look at the housing industry - no awards and no third party intervention, an industry that is virtually dispute free with workers who earn good wages and appear to be happy, and that is one of the most efficient housing industries in the world.


The reality is that employers compete actively in the market place for the services of labour and labour has many alternative sources of income. Further, the contract entered into between an employer and an employee involves a complex balancing of respective costs and benefits so that the outcome cannot be judged by third parties as to fairness because the decisions involved are fundamentally a matter for the individuals concerned.





I also attended the NSW Budget lock-up and wrote the attached piece for The Daily Telegraph, arguing that the next Government will need an Audit Commission to identify the areas of over-spending in what is clearly now the highest-taxed State.



Victim Politics in Oz

By Hugo Restall, editorial page editor of The Asian Wall Street Journal.

Australian Prime Minister John Howard refuses to apologize to the Aborigines
for wrongs committed by the state 50 years ago. That's an unusual stance in
this day and age. After all, the Pope has apologized to the Jews for anti -semitism. Canada has apologized to its native population for stealing its land. U.S. President Bill Clinton has apologized to Africa for slavery. So what's the harm in saying "sorry, mate"?

Plenty, actually. Australia's social harmony is now being strained as activists mount a concerted campaign to promote the idea of Aboriginal victimhood. The nation is not one but two, this thinking goes, and the whites inflicted a genocide on the black. To end the war a treaty must be signed, and the whites must pay reparations in perpetuity. Never mind that the perpetrators of these terrible crimes are dead, and their descendants are running a liberal democratic state with equal opportunity for all.

Mr. Howard is a decent fellow. He's so nice he even says he's sorry if he causes hurt by not saying sorry. He's willing to work toward national reconciliation. Last year he moved a motion in parliament expressing "deep and sincere regret" for the "mistreatment of many indigenous Australians over a significant period."

But on the issue of a flat-out apology, he's sticking to his principles. What's the difference? An apology would mean more than simply acknowledging history. It would imply guilt, and that would in turn mean punishment of one group and compensation of another. The old specter of collective responsibility is rising once again.

It's hardly surprising Aboriginal leaders are pressing for as many benefits as white guilt will stand. There has been a steady escalation in the terms of the debate, just as there was in the U.S. to justify the continuation of affirmative action programs. The latest rallying cry is cultural genocide. That is based on a report several years ago by Sir Ronald Wilson entitled "Bringing Them Home." It claimed that up to one-third of Aborigine children were taken from their homes and put in foster care in the first half of the century in order to facilitate assimilation and destroy Aborigine culture.

However, the figures in the report were overblown, and the reasons for foster care were much more complex. That was the message of a new report by Aboriginal Affairs Minister John Herron, leaked last month, which found little evidence of a "stolen generation" of children. While white Australia 50 years ago was undoubtedly a racist place, it doesn't follow that it wanted to wipe Aborigines from the face of the earth. Rather, hyped claims suggest that the activists are more interested in bargaining for advantage in today's Australia than getting at the truth.

Indeed, some Aboriginal groups now say they want a peace treaty with white
Australia. Mr. Howard has answered, "Countries don't make treaties with
themselves, they make treaties with other nations and the very notion of a treaty in this context conjures up the idea that we are two separate nations. Now I thought the whole idea of reconciliation was to prevent that occurring." Even the opposition Labour Party is wary of the treaty push and the claims of compensation it might bring.

In fact Mr. Howard has been leading an effort to find political consensus for measures that don't involve further dividing the country. One plan, presented by the Council for Aboriginal Reconciliation, has wide backing. The prime minister still objects to some provisions which would give separate rights rather than equal rights. But his qualified support shows that the government is sincere in finding a solution.

For the activists, however, it's certainly convenient to have a conservative leader who can be demagogued for refusing to make a simple apology. Last Saturday Mr. Howard faced the boos of a crowd celebrating Corroborree 2000 -- a two-day event dedicated to better relations between the races. About 700 people turned their backs as he delivered a speech in front of the Sydney Opera House. The confrontation took a toll on the prime minister -- to the television cameras he seemed composed, but his right leg shook uncontrollably.

Unpleasant as this must have been for him personally, the consequences for Australia are the main worry. The question for the government now is not so
much how to allow Aborigines to preserve their culture, which they are now free to do, but rather how to prevent the creation of a permanent underclass. In many ways assimilation has already happened: About two-thirds of the native population now lives in urban areas, and the same proportion is married to whites. Yet Aborigine children are less likely to attend school than the general population, and more likely to end up in prison when they grow up.

The real cause of this is dependency on the government. Welfare handouts create a sense of entitlement based on past discrimination. That can only sap young Aborigines' sense of self-reliance.

The upcoming Olympic Games will create a marvelous forum for activists to accuse the government of that most modern sin, insensitivity. They will once again press their claim for special treatment. But Mr. Howard is right that separatism is the original problem, not the solution. Only by promoting equal rights and responsibilities can he hope to find true reconciliation. Thankfully, the majority of Australians still seem to be convinced of that.



Reconciliation - A New Approach is Needed

By Peter Howson

The Australian Financial Review
Monday 29 May 2000

The presentation of the Declaration Towards Reconciliation at Corroberee 2000 was meant as the culmination of the 10 year reconciliation attempt by the Council for Aboriginal Reconciliation. Those who unfairly blame its failure on intransigence by the Prime Minister, who released his own version entitled Towards a Common Destiny, have clearly not examined carefully the vital differences between the two documents.

Whereas the Prime Minister's version is restrained and on behalf of all Australians, the Council's is seriously divisive and unacceptable to most. Indeed, the Council's own research into reconciliation has revealed it is even out of line with the views of many full blood Aborigines.

The Council, along with ATSIC, has also let Australia down by failing to counter such false portrayals of treatment of Aborigines as engendered by Sir Ronald Wilson's outrageous genocide accusation in Bringing Them Home and delinquent outbursts by  Charles Perkins. Overseas media are starting unjustifiably to categorise Australia as a pariah, and a real danger exists that bodies such as the UN may follow suit.

 There are three serious problems with the Council's approach.

 First, it demands an apology for "the injustices of the past". Yet, while few Australians do not accept that some injustices occurred, most reject the concept of an apology. Despite this, almost all media commentators persist in attacking the Prime Minister for his realistic explanation that one generation cannot assume responsibility for the sins of previous ones. They also refuse to acknowledge his previously expressed sincere regret for those injustices or to explain why that is not acceptable.

The Council's real aims, however, were reflected in two other totally unacceptable proposals - one demanding recognition of "continuing customary laws, beliefs and traditions" and the other the right to "self determination within the life of the nation". In essence, traditional Aboriginal practices would be given special recognition in Australian law and some form of separate government would be allowed. Now, some Aboriginal leaders have even upped the ante by demanding such provisions be incorporated in a Treaty!

 Anything more calculated to cause division is difficult to imagine. Why have proposals that would allow separate laws for Aborigines, and a separate, racially-based state within Australia, not been widely condemned?
The Prime Minister is to be applauded for rejecting such obnoxious notions.

The emphasis in his response on the decreasing importance of traditional lifestyles  to Aborigines was also highly important. Thus, less than 3 per cent of indigenous families live in improvised dwellings and one in three now own their own homes; about one third are completing secondary school and 45,000 are undertaking vocational education and training.

 With the proportion of indigenous adults married (de facto or de jure) to non-indigenous spouses increasing from 46 per cent in 1986 to 64 per cent today;  with the majority of Aborigines now of mixed descent; and with over 70 per cent living in urban communities and professing Christianity, the  promotion of separate laws and states is surely  completely out of touch with reality.

 None of this means that these Aborigines have or should cut all links with
their traditional cultures, any more than those migrants from non-Anglo-Saxon countries have cut their's. But it does mean they are increasingly participating more actively in the wider community.

 For the remaining minority, we now know that the separatist policies  of
the past thirty years have been disastrous. They have caused much of  the "hopelessness, despair, and anti-social behaviour ..and contempt and hostility" identified in the report by John Reeves QC on Northern Territory land rights.

 Many other reports have revealed the horrific violence, particularly  in traditional
Aboriginal communities, and a growing number of studies attribute much of  such
violence to separatist policies of  land rights and self-determination. A psychology of victimhood has also been created that is having adverse effects on relations between whites and aborigines.

 Why has the Human Rights and Equal Opportunities Commission failed to
investigate these serious breaches of human rights? Is it afraid of discovering the real causes?

 An entirely new approach to reconciliation is required, one that encourages
those still in traditional communities to become more closely involved in
the wider community. If, as some Aboriginal leaders claim, the Prime Minister is splitting hairs, why cannot  they make the perceived marginal change needed to reconcile both Aboriginal and white cultures  in the context of modern society?

 Peter Howson was Minister for Aboriginal Affairs in 1971 and 1972

Why Australia Can Run an Independent Monetary Policy


The Australian Financial Review
22nd May 2000

The recent large $A depreciation has revived memories of the 1980s and the monetary policy tightening that ended in the recession we "had to have" (but should not have). Indeed, with the $A running near all time lows, one "expert" whose voice had scarcely broken spluttered on the ABC that this is the dollar's worst crisis! And, with the Federal Reserve's official cash rate now half a per cent above the Reserve Bank's 6.0 per cent, many say  the Reserve must follow to "protect" the dollar.

However, such thinking is quite outdated. There is absolutely no reason why Australia cannot now run an independent monetary policy and avoid further rate rises. Even apart from the much greater US inflationary pressures, our situation today is totally different to the 1980s. Then, Labor's basically Keynesian macro policies kept inflation running well above the OECD average and, until far too late, the Reserve Bank had to accept an inflation rate largely determined by wages set through Accords with unions.

Today, both Government and Opposition are at least committed to balancing the budget over the cycle. Further, while this year's Budget leaves something to be desired, "estimates" of considerable forward surpluses indicate it is substantively "on track", even allowing that such estimates need discounting. Most importantly, in a too-little-noticed structural change, the responsibility for controlling inflation has passed to a Reserve Bank that has substantial independence and is committed to maintaining low inflation.

We now have a monetary policy target to keep underlying inflation to an average of 2-3 per cent pa over the cycle and a rate currently well within that target. Accordingly, the main argument today is not about how to get inflation down, but how  to maintain medium term price stability without adversely impinging on growth. We could be so lucky!  

But, what about the dollar? Shouldn't we be concerned about its fall? With one main proviso, the answer to that question is a firm "No" in circumstances where macro policies and inflation are basically on track - which is clearly so at present. The proviso is that, if markets became "disorderly", there may be a case for the Bank to intervene in the foreign exchange market to "smooth" fluctuations in the rate. But the  Bank should stick to its stated policy of not targeting an exchange rate and, hence,  not changing monetary policy to influence it.

Of course, if a depreciation pushed inflation above the target range on a sustained basis, the Bank might need to tighten  policy. But, the first round inflation effects from increased import prices flowing from the recent $A depreciation are one-offs comparable to the GST. Indeed, from one perspective all depreciations are a tax - but levied by foreigners!

Importantly, the recent $A depreciation does not reflect excess demand in the domestic economy or a current account deficit out of control. That depreciation is also a one-off in that both macro policy settings and the current account provide no basis for supposing any further substantial depreciation. Indeed, with a real effective exchange rate significantly below its long term average, there could be a substantial reversal over the next 18 months, particularly if the world economy strengthens as forecast.

Accordingly, any first round effects from the recent depreciation should not be counted in the underlying inflation rate and, hence, should not cause any tightening in monetary policy. If inflation moved above 3 per cent, that should be treated as a one-off until it became clear that the flow-through had become embedded. Even then, given the existing target provides for an average of 2-3 per cent over the cycle, there would be a case for waiting to see if natural competitive forces responded to higher import prices and worked the effects off over time (who remembers the "J curve" effect?!)

The Bank's Semi-Annual statement of 3 May correctly suggests the pass-through effects of the latest depreciation could be stronger than in 1997 and 1998 when more competitive conditions prevailed. However, competition remains strong and the statement also indicated that "on present assumptions, inflation on a year-end basis, and net of tax effects, is projected to be between 2 and 3 per cent in the second half of 2001".

In short, the Bank is "forecasting" inflation to stay within target over the foreseeable future. The clear implication is that, provided "present assumptions" are met (including presumably those allowing for the inflationary effects of depreciation),  there is no reason to expect a further increase in interest rates. So much for the speculation that the Bank is taking a different view to Treasury!

Wages threat to economic stability

The Australian Financial Review- 7 June 2000



The irresponsible rejection by the Democrats of the Government's legislative proposals to deal with unions' threat to mount a wage campaign across the manufacturing industry makes it virtually certain that such a campaign will take place. Moreover, the manifold difficulties faced by businesses in resisting union intimidation mean there is now a serious threat to levels of economic activity and employment from inflationary wage increases.


Democrat Leader, Meg Lees, has displayed extreme naivety in accepting assurances from unions that their campaign will be "responsible".  The unions involved have a long history of militancy, leading to the employment-destroying wage increases of mid 1970s and early 1980s, and their current leaders are basically opposed to the capitalist system. The reality is that, after initially indicating  preparedness to seriously consider legislative changes, the Democrats collapsed in a heap when union threatened to target in the next election any Democrat who supported the legislation.


Of course, the Democrats are not the only ones to have caved in to union power and Labor must share the blame for what happens now. Opposition Leader, Kim Beazley, had already created the precedent last week when he announced that Labor's policy for the next election would be to enhance the role of the Australian Industrial Relations Commission, to give specific recognition to the right to collective bargaining, and to abolish individual agreements (known as AWAs).


In short, under Labor a system that is already unique in the extent of third party intervention in employer-employee relations and the privileged position given  unions, would have further deterrents to employment. With Victoria's manufacturing industry now likely to be the initial union target, Premier Bracks will hardly be thanking his Federal counterpart, particularly as sections of the Victorian public service have recently secured a 9 per cent wage increase for the past year and Victorian teachers have lodged a claim for a 30 per cent increase over three years.


Some will suggest that employers and supporters of free enterprise should not complain if they have to fight it out with unions in the market place. Indeed, on one view, the Government's amendments would have increased the regulation of the labour market. But the reason is that the tribunals have continued to find ways of interpreting the law in favour of unions, to such an extent that employers have to fight with one hand tied behind their backs.    


The most recent example is the extraordinary interventionist, pro-union decisions of the Federal Court in the recent building industry dispute in Victoria. Those decisions effectively neutered two important statutory provisions clearly designed to protect employers against union intimidation and forced the Government into trying to amend the legislation. Suggestions by the Democrats that the Government was conducting a "vendetta" against the Federal Court are absurd: that Court was acting irresponsibly and legislation to correct its behaviour was fully justified.


Thus, it is almost certain that manufacturing industry unions will now go out in the field and target one or two of the companies most likely to cave in, possibly in the protected motor vehicle industry. This will then lead to a flow-on through the rest of the industry, as happened in the Victorian building industry dispute, where unions eventually obtained wage increases ranging between 15- 24 per cent over three years, plus a 36 hour week. Is it any wonder that business confidence has fallen sharply?


Just what concessions the unions extract from manufacturers, and with what flow-on potential, cannot be predicted. Structural changes in the economy and the role of the AIRC have reduced the potential for flow-ons to the rest of the economy. Even so, union militancy in manufacturing will encourage radicals in other unions to press claims too.


The Reserve Bank, which has the responsibility for keeping inflation to the 2-3 per cent target, could soon face a major test. If the manufacturing unions obtain wage increases and other concessions inconsistent with sustaining the inflation target, the Bank will have no option but to raise interest rates, despite the adverse employment and activity consequences that would flow.


The Government's right to govern is under threat. There is only one way of dealing with that.

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An Olympian effort,
but the numbers are all Greek

The Daily Telegraph - 24 May 2000

In many respects the Carr Government's  Budget for 2000-01 is  Olympian - but not simply because, as Treasurer Egan claims, the Government has paid for the Olmpics and still managed to provide for an estimated small cash surplus of $393 million. This Budget is also Olympian in its levels of spending and, even with the new tax reductions, also in the severity of the taxes that the State will continue to levy even after the GST comes into operation from July.

Mr Egan's proud boast is that all the Olympics spending has been fully funded from the Budget and at the same time the Government will achieve in 2000-01 the fourth out of six cash surpluses that NSW Governments have managed over history. While (as just about everyone expected) the Olympics will  cost a lot more than originally estimated, the Treasurer must be given credit for funding them without going into debt. Indeed, his cash surplus is even better than it looks because it is struck after setting aside some $310  million as a pre-payment for future superannuation liabilities.

Hence a better guide to the underlying budgetary outlook is the estimate of $659 million for the net lending surplus for 2000-01 because this reflects only the effects of the current year's activities. This estimated net lending surplus comes on top of the revised 1999-00 estimate for a surplus of more than $1.1 billion, over $500 million of which is also being put away into what Mr Egan described as his `rainy day` fund for future superannuation liabilities. While this can be regarded as prudent, one could be excused for thinking that the NSW Government has money coming out of its ears if it can make such large pre-payments for the future.

There is marked  contrast between these provisions for future superannuation and the size of the latest  cuts in pay roll tax and stamp duties that Mr Egan is vaunting (which include a decision to further encourage first home buyers in metropolitan Sydney which appears to conflict with the Premier's view that Sydney is already over-crowded!). These tax cuts total a miniscule $127 million next year, equivalent to only about one per cent of total tax revenue of around $12.5 billion.

Admittedly, these cuts come on top of the tax reductions announced last year so that the total effect of tax policy changes is to reduce tax revenue by over $600 million or about 5 per cent in 2000-01.The Budget papers also hold out the promise that the Government intends to `close the gap between the New South Wales' tax burden and the national average over the medium term`.

But, while this move down the tax reduction path  is most welcome, it is starting from a very high base. The Carr Government has taken this State from having tax rates well below Victoria's to having rates that were on average 10 per cent above in 1998-99. In that year New South Wales residents were paying about $2 billion more in taxes than if they had paid the same amounts per head as their southern cousins. Just what that figure is now is almost impossible to estimate because of the changes in accounting and inter-governmental arrangements. But the difference is almost certainly still large. In short, the Government still has a lot of tax reductions to do to make the State more competitive.

This emphasises the point that it is not sufficient to assess a State's budgetary performance only by reference to the overall result: a surplus is easy to achieve if taxes are allowed to run rampant. Thus, Treasurer Egan's focus on the improvements in the financial side of the Budget, including reductions in net liabilities, is clearly calculated to try to divert attention from the excessively high spending and tax levels that continue to exist.

These have been built up over the past five years as the Carr Government has, ironically, reaped the economic benefits from the much improved budgetary policies pursued by the conservatives in Canberra. Those policies should also sustain growth in the NSW economy in 2000-01, along with the boost from the Olympics and the demutualisation of the NRMA.

The accounting changes make it difficult to identify the extent and areas where the expenditure side of the Budget is padded. But the next Government will almost certainly need to appoint an Audit Commission to undertake a detailed examination and reveal the scope for making a major reduction in State taxation levels.