Australia
Recent Economic Developments
Author:
International Monetary Fund
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Publication Date:
16 May 1996
eISBN:
9781451801934
Language:
English
Keywords:
ISCR; CR; real GDP; exchange rate; monetary policy; private sector; labor market; output gap; percent of GDP; balance of payments; net capital
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This paper reviews developments in the Australian economy during 1994–95. In 1994/95, real GDP grew by 4½ percent as growth in domestic demand accelerated sharply, rising by 6¾ percent, despite the impact of a severe drought on farm output. Business investment increased by 17½ percent with investment in plant and equipment rising by 21½ percent and that in nonresidential construction by 7¾ percent. Private consumption growth also rose strongly, by 5 percent, reflecting strong growth in employment and some acceleration in wage growth.

Abstract

This paper reviews developments in the Australian economy during 1994–95. In 1994/95, real GDP grew by 4½ percent as growth in domestic demand accelerated sharply, rising by 6¾ percent, despite the impact of a severe drought on farm output. Business investment increased by 17½ percent with investment in plant and equipment rising by 21½ percent and that in nonresidential construction by 7¾ percent. Private consumption growth also rose strongly, by 5 percent, reflecting strong growth in employment and some acceleration in wage growth.

I. Introduction

This paper reviews developments in the Australian economy since the last report on Recent Economic Developments issued in January 1994. The focus of this paper is Australia’s current economic cycle—now into its fifth year of recovery—and associated developments in public finances, the monetary policy framework, and the balance of payments. An accompanying set of payers1 addresses some of these issues in a longer-run perspective.

The Australian economy has now completed four years of solid growth since the recession of 1990/91, which saw output decline and unemployment eventually peak at 11 percent The performance of this period stands well in comparison with other industrial countries. Chapter II analyses the gradually strengthening nature of the recovery through 1994/95, based on external and domestic demand, with private business investment playing an increasingly important part. Issues of sustainability were raised during 1994/95, as growth and the external current account hit cyclical peaks of 6 percent; in addition, according to some indicators, the output gap was closed.

Although growth has slowed in 1995/96—to a more moderate 3 ¼ percent in the year to September 1995—pressures on costs and prices have emerged. These pressures reflected—in addition to the strains from rapid growth—a strengthening of international commodity prices and a weakening of the exchange rate in the first half of 1995. Thus, after several years of subdued inflation, the 12-month “headline” inflation rate increased to just over 5 percent in December 1995, and the “underlying” inflation rate increased to 3¼ percent in the same period. In the context of these developments, a key issue is whether the current pace of growth is sufficiently restrained to keep domestic inflationary pressures in check.

The emergence of wage and price pressures, with unemployment—although declining quite rapidly in 1994/95—still well in excess of the official target of 5 percent is symptomatic of the challenges faced by Australia in achieving the unemployment objective. Chapter III reviews labor market developments, as well as some underlying causes for a natural rate of unemployment (NAIRU) that is above the targeted unemployment rate. These include continuing rigidities in the industrial relations system and inadequate labor force skills. Government initiatives aimed at promoting a more flexible and efficient labor market are also reviewed. Most important among these have been the ongoing shift to an enterprise-based bargaining system, and active labor market policies such as those under the Job Compact, one of the programs introduced in the May 1994 Working Nation statement.

Chapter IV discusses public finances, reviewing developments at the Commonwealth and state levels. A key conclusion is that, whereas considerable progress was made during the 1990s in fiscal consolidation at the state and local government level, there has been relatively little progress to date in reducing the structural deficit of the Commonwealth budget. Consequently, the Government committed itself in the 1995/96 budget to accelerate medium-term consolidation with a view to raising national saving over the remainder of this decade.

With growth reaching an unsustainably rapid rate during 1994, and the resultant increase in inflationary pressures, monetary policy was tightened decisively in late 1994. This tightening, in the form of three step increases in the Reserve Bank of Australia’s (Reserve Bank) cash rate, took place within a relatively new monetary policy framework. This frame-work—announced in 1993—aims at maintaining underlying inflation at an average rate of 2-3 percent over the course of the business cycle. Its essential elements are reviewed in Chapter V.

A notable aspect of the recovery has been the relatively quick and sharp deterioration in the external position. This, in turn, has stemmed from a secular decline in the national savings rate—rather than competitiveness—a decline which has been considerably faster than that experienced in the OECD as a whole. While private saving has declined, the root cause has been the larger decline in public sector saving. A main focus of medium-term fiscal consolidation—and of the overall strategy to raise national saving—is to reverse the structural deterioration in the external position, and to reduce the level of external debt. External sector developments are reviewed in Chapter VI.

After narrowing with the recession of the early 1990s, the current account deficit steadily widened, peaking at nearly 6 percent of GDP in 1994/95, but has since declined somewhat with the moderation in domestic activity. The merchandise trade balance has been the driving force behind recent developments in the current account Imports have quickly reflected domestic demand developments, most recently the surge in plant and equipment investment in the domestic economy, while rural exports have been affected by a severe drought. On the export side, two leading trends warrant attention: first, the dynamic growth of manufactured goods, which now account for a quarter of the total; and, second, the increasingly important role of Asian markets, which now absorb about half of all exports.

The financing of the large current account deficits resulted in a significant increase in the outstanding stock of net foreign debt following the removal of capital and exchange controls in the early 1980s. In contrast with the clear predominance of debt financing in the 1980s, debt and equity flows have been about equally balanced in the 1990s. Borrowing by the states was the main source of net external borrowing in the early 1990s, as the private corporate sector shifted to equity financing pari passu with the restructuring of its balance sheets.

The Australian economy is still undergoing substantial structural change. Chapter VII gives the details of the next major phase of reform in one key area—national competition policy-based on the implementation of the recommendations of the 1993 Hilmer Report. The new initiatives stem from the agreements reached in April 1995 between the Commonwealth and the states aimed at promoting competition in the public enterprise and other previously sheltered sectors of the economy. Benefits from these reforms—which are due to be completed by the year 2000—are estimated to be potentially as significant as those ushered in by the trade reforms. Progress is also being made in privatization, especially at the state level—with Victoria at the forefront of an aggressive privatization program.

In addition, a number of background papers have been prepared in an accompanying volume that addresses selected key issues in greater analytical detail.2

Of relevance to Australia’s basic economic challenge of raising growth sufficiently to lower unemployment closer to the official target, there is a paper that reviews a range of estimates of potential output and the implied output gaps. This paper is one important dimension of the staffs work toward assessing the current cyclical position of the Australian economy, as well as the range for the medium-term sustainable growth rate of the economy.

The next three papers concern the issue of national saving, the indispensable central element in any scenario for raising potential output. First, there is a paper that gives a long-run perspective on Australia’s saving problem, and reviews recent initiatives for raising both private and public saving. This is followed by two papers on the economic and financial position of the Australian states, whose role in the overall saving context is a significant one. These papers review the nature of fiscal consolidation efforts in the states, efforts that have been markedly successful in transforming the state sector from a traditional net user of national saving into a provider of saving. With an improvement in public saving a key issue for the medium term—as part of any scenario to raise the rate of sustainable growth and achieve the Government’s unemployment target—the recent performance of the states establishes a strengthened base for further fiscal consolidation at the Commonwealth level.

The fifth paper discusses Australia’s labor market reforms against the background of labor market developments in other industrial countries.

A final background paper describes the evolution of Australia’s monetary policy objectives and briefly compares inflation targeting in Australia with the practice in some other countries.

II. Real Sector

1. National income and production

Since the cyclical trough in mid-1991, the Australian economy has completed four years of uninterrupted growth during which period output has expanded by 16¾ percent.3 In its initial stages, the recovery was gradual and based mainly on private consumption spending. However, growth accelerated in 1993/94 and 1994/95, as a tightening output gap and growing business confidence contributed to a rebound in business investment.

a. Overview of the expansion

Since the September 1991 quarter, the economy has been recovering from a recession that began in mid-1990 and which saw output decline by 1 percent in 1990/91 (Tables 1, and 2 and Chart 1). However, the recovery was initially slow, with real GDP rising by only 3¾ percent in 1991/92, led by increased public consumption, a recovery in private consumption, and net exports. Business investment fell sharply due to the significant margin of slack that had developed during the recession, declining profitability, and the corporate sector’s desire to strengthen its balance sheet by continuing to repay the debt it had built up in the 1980s (Chart 2). Investment in the nonresidential construction sector fell particularly sharply due to overbuilding in the late-1980s.

Table 1.

Australia: Selected National Accounts Aggregates at 1989/90 Prices, 1990/91-1995/96

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Source: Australian Bureau of Statistics, National Accounts.

Seasonally adjusted.

Includes real estate transfer expenses.

Contributions to GDP(I) growth, at annual rates.

Table 2.

Australia: Income Components of Gross Domestic Product, 1990/91-1995/96

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Source: Australian Bureau of Statistics, National Accounts.

Seasonally adjusted.

Net of Imputed bank service charge.

Gross operating surplus of trading enterprise companies plus the gross operating surplus of financial enterprises (net of Imputed bank service charge).

CHART 1
CHART 1

AUSTRALIA REAL OUTPUT, 1984/85-1995/96

Citation: IMF Staff Country Reports 1996, 037; 10.5089/9781451801934.002.A001

Source: Australian Bureau of Statistics.
CHART 2
CHART 2

AUSTRALIA COMPANY PROFITS AND BUSINESS INVESTMENT, 1984/85-1995/96

(Annual percent change)

Citation: IMF Staff Country Reports 1996, 037; 10.5089/9781451801934.002.A001

Source: Australian Bureau of Statistics.

Activity strengthened in 1992/93, with real GDP rising by 3 percent as domestic demand recovered strongly. The household sector led the way as residential construction activity rebounded (11 percent) reflecting rising consumer confidence, the steep decline in mortgage interest rates, and the relatively low levels of household debt Private consumption growth also remained robust as the strong activity in the housing market supported a boost in expenditure on consumer durables, and the household saving ratio declined from 5 percent in 1991/92 to 4½ percent in 1992/93 (Table 3). Business investment also began to recover, recording its first increase since 1988/89. Plant and equipment investment rose by 10¼ percent, spurred by rising capacity utilization, increasing profitability, and declining corporate debt levels. However, nonresidential construction declined by a further 8¼ percent.

Table 3.

Australia: Household Income, Expenditure, and Savings, 1990/91-1995/96

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Source: Australian Bureau of Statistics, National Accounts.

Seasonally adjusted.

Includes the income of other unincorporated enterprises, rent from dwellings, interest, and dividends.

Includes third-party insurance transfers, transfers from overseas, and current grants to nonprofit organizations.

Includes income tax, other direct taxes, fees, fines, consumer debt interest, and unrequited transfers to overseas.

Savings is derived as a balancing item.

Deflated by the implicit price deflator for private consumption expenditure.

Savings as a percent of household disposable income.

The recovery subsequently gathered momentum. Real GDP grew by 4 percent in 1993/94, and some estimates indicate that the output gap that opened up in the early 1990s had closed by mid-1994.4 A strengthening in the international environment, especially the high growth in the East Asian countries (excluding Japan), helped exports increase by 10 percent, and resulted in a contribution to GDP growth from net exports of one half of a percentage point Growth in domestic demand continued at around 3¼ percent, as business investment rose by 7 percent and dwelling investment remained strong. Private consumption grew by 2½ percent and the household saving ratio remained stable.

In 1994/95, real GDP grew by 4¾ percent as growth in domestic demand accelerated sharply, rising by 6¾ percent, despite the impact of a severe drought on farm output Business investment increased by 17½ percent with investment in plant and equipment rising by 21½ percent and that in nonresidential construction by 7¾ percent Private consumption growth also rose strongly, by 5 percent (its strongest growth in over 20 years), reflecting strong growth in employment and some acceleration in wage growth, but also a sharp decline in the household saving ratio to only 3¼ percent. Growth in residential investment slowed during the course of the year as the housing cycle passed its peak and mortgage interest rates increased with the tightening of monetary policy in the second half of the year. After declining in 1992/93 and 1993/94, public investment increased by 14½ percent, while public consumption continued to rise steadily. The sharp increase in domestic demand resulted in a 17½ percent rise in import volumes during 1994/95. Together with weak growth in export volumes as a result of the drought, net exports detracted 2¾ percentage points from GDP growth.

Over the period 1991/92-1994/95, gross national saving (accumulation) rose from 15½ percent of GDP to 17 percent of GDP (Table 4). While the household saving ratio declined (in 1994/95, it was likely affected by the impact of the drought on farm incomes), corporate saving increased with the recovery in profitability, public saving also increased. However, with the ratio of investment-to-GDP rising from 19½ percent to 22¼ percent over the same period (and the statistical discrepancy shifting by 1½ percent of GDP), the contribution of foreign saving increased from 3 percent of GDP in 1991/92 to 5½ percent of GDP in 1994/95.

Table 4.

Australia: Savings and Investment Balances, 1990/91-1994/95

(In percent of GDP)

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Source: Australian Bureau of Statistics, National Accounts.

On the production side, the recovery has been strongest in the manufacturing, construction, and transportation sectors. After declining by 2½ percent in 1991/92, manufacturing output rose by 4¼ percent in 1992/93, increasing to 8½ percent in 1994/95. This growth reflects the strong performance of manufactured exports, particularly to the Asian region. The buoyancy of the construction sector initially reflected the strong activity in the housing sector. However, as this sector has slowed, it has been replaced by a pickup in nonresidential construction activity. In 1994/95, production in all sectors rose strongly except for agriculture, which, reflecting the impact of the drought, fell by 20½ percent.

b. Recent developments in activity

Growth has slowed significantly over the course of the past year, from 6¼ percent in the year to September 1994 to 3¼ percent in the year to September 1995. This slowdown has been evident in most components of demand, but particularly in the housing sector, and can be attributed in part to the impact of the monetary policy tightening during the second half of 1994. Investment in residential construction declined by 14½ percent in the year to September 1995, while growth in business investment moderated to 7¼ percent from 18½ percent in the year to September 1994, as a sharp slowing in growth in the plant and equipment component (from 25¾ percent to 2 percent) was only partly offset by stronger investment in nonresidential construction (1¼ percent to 23 percent).5 Private consumption expenditure also slowed over the course of 1995, rising by 3½ percent in the year to September 1995. The household saving ratio stood at 3½ percent in the quarter. Net exports made no contribution to growth over the year to the September quarter, despite a slowing in the growth of import volumes to 6¼ percent.

The September 1995 quarter saw a large increase in stock levels, with nonfarm stocks contributing about 1 percentage point to the 1½ percent GDP growth in the quarter (this represented the largest quarterly stock accumulation since the early 1970s). Thes tock-to-sales ratio has now increased for five consecutive quarters, in sharp contrast to the long-term downward trend in the ratio; the stock buildup may therefore represent an unanticipated accumulation on the part of companies.

Reflecting the easing of the drought, agricultural output rebounded strongly in the September 1995 quarter, rising by 20 percent and by 10½ percent in the year to September 1995.

2. Prices

Inflation declined sharply during the recession in the early 1990s. After averaging 7½ percent in 1988/89-1989/90, headline consumer price index (CPI) inflation fell to 5¼ percent in 1990/91 and further to an average of 1½ percent in 1991/92-1993/94, its lowest level since the late 1960s (Table 5 and Chart 3). The Treasury measure of underlying CPI inflation6 fell somewhat slower than the headline index, reflecting the absence of the impact of declining mortgage interest rates, but stood at 2 percent in 1992/93 and 1993/94. Several factors contributed to the decline in inflationary pressures. Large output gaps opened up during the recession, and, given the initially subdued recovery, these were slow to close. Wage increases were also limited by the weakness of the labor market (see Chapter III). In addition, structural change and the increased openness of the economy to international competition helped to promote greater restraint on the part of companies in holding down price pressures, and the decline in inflation, together with a greater perceived commitment by the authorities to maintain low inflation, eventually contributed to a fall in inflation expectations.

Table 5.

Australia: Selected Price Indices, 1990/91-1995/96

(Percent change from previous year)

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Sources: Australian Bureau of Statistics, National Accounts: Reserve Bank of Australia, Bulletin: and data provided by the Treasury.

The consumer price index excluding interest charges, gasoline, and certain other exogenous and seasonal items; used as an indicator of underlying inflation.

Goods and nonfactor services.

CHART 3
CHART 3

AUSTRALIA PRICES, 1984/85-1995/96

(Annual percent change)

Citation: IMF Staff Country Reports 1996, 037; 10.5089/9781451801934.002.A001

Source: Australian Bureau of Statistics.1/ The consumer price index excluding interest charges, gasoline, and certain other exogenous and seasonal items; used as an indicator of underlying inflation.

Cyclical pressures on costs and prices began to emerge in the second half of 1994 as the margins of slack in the economy narrowed and stronger growth in the world economy boosted commodity prices, particularly for oil and base metals. While the strengthening of the Australian dollar in the second half of 1994 initially helped to limit the impact of these developments on domestic prices, the weakening of the exchange rate in the first half of 1995 increased the costs of imported inputs and pressures on consumer prices began to emerge. Headline inflation picked up to 3¼ percent in 1994/95, and to a little over 5 percent in the year to December 1995. Initially, this mainly reflected the impact of the tightening of monetary policy in the second half of 1994 on mortgage and other interest rates, and underlying inflation remained little changed at around 2 percent. However, through the year, underlying inflation accelerated, reaching 2½ percent in the year to June 1995, and 3¼ percent in the year to December 1995. Both the headline and underlying rates have been boosted by the impact of indirect tax increases in recent quarters, which have added around ½ percent to underlying inflation. Despite the strong increase in activity in the housing market, residential property prices have remained subdued since the early 1990s (Chart 4).

CHART 4
CHART 4

AUSTRALIA OTHER PRICE DEVELOPMENTS, 1984/85-1995/96

(Annual percent change)

Citation: IMF Staff Country Reports 1996, 037; 10.5089/9781451801934.002.A001

Source: Australian Bureau of Statistics.

III. Labor Market Developments

1. Overview

After a period of fairly weak employment growth during the initial years of recovery, the labor market tightened in 1994 and the first part of 1995. The sharp increase in employment and decline in unemployment in the past two years has resulted in an increase in wage pressures. Unit labor costs, which had previously been very moderate as productivity growth in large part offset wage growth, began to accelerate in the latter part of 1995, marked by highly publicized, large wage claims in certain industries. Although the latest Accord agreement included a commitment by the Australian Council of Trade Unions (ACTU) to keep wage claims in line with the Reserve Bank’s inflation objective, the ACTLT s ability to control aggregate wage outcomes may have been eroded to some extent by the spread of enterprise bargaining over the last two years.

2. Employment

The strong rebound in activity over the past two years resulted in an increase in employment and labor force participation and a corresponding decline in unemployment After registering a decline of 2 percent in 1991/92 and no growth in 1992/93, total employment rose by 2 percent in 1993/94 and by 4 percent in 1994/95 (Table 6 and Chart 5). Part-time employment initially accounted for a large part of the growth, with full-time employment becoming increasingly important in 1994/95. Employment growth stemmed mainly from the services sector, while the share of agriculture, mining, and utilities in total employment declined. The job vacancy rate (vacancies as a percentage of employees plus vacancies) peaked at 1.08 percent in the third quarter of 1994 and has been on a downward trend since.

Table 6.

Australia: Labor Market, 1990/91-1995/96 1/

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Sources: Australian Bureau of Statistics, Australian Economic Indicators: and Reserve Bank of Australia, Bulletin.

Seasonally adjusted.

From previous year.

Labor force as a percentage of population aged 15 and over.

As a percentage of the labor force.

Over one year.

CHART 5
CHART 5

AUSTRALIA EMPLOYMENT AND UNEMPLOYMENT, 1984/85-1995/96

Citation: IMF Staff Country Reports 1996, 037; 10.5089/9781451801934.002.A001

Source: Reserve Bank of Australia, Bulletin.1/ Over one year.

Unemployment, which rose during the early 1990s to a high of 11¼ percent in December 1992, fell gradually in 1993/94, then more rapidly in 1994/95, and stood at 8½ percent in January 1996. However, it remains well above the Government’s announced target of 5 percent unemployment by the year 2000. Further, estimates suggest that the NAIRU has risen from 6½ percent in the late 1980s to around 7½-8 percent currently.7 This increase can be partly attributed to the structural change that has taken place in the Australian economy over this period, particularly the impact of trade liberalization on import-competing manufacturing industry and the significant reductions in employment in the state government and public trading enterprise (PTE) sectors (see Chapter IV).

Labor force participation has remained at a relatively high rate in recent years. The participation rate dipped only slightly from an average of 63½ percent in 1990/91 to 62½ percent in 1992/93, but has risen over the past two years to 63¼ percent in 1994/95, well above the average rate in the 1980s. Long-term unemployment, the ratio of the number of persons unemployed for a year or more to total unemployment, increased from 22 percent in 1990/91 to 38 percent in 1993/94, but declined slightly to 36 percent in 1994/95. This may be due to the Job Compact initiatives–introduced in 1994 as part of the four-year Working Nation policy package to help the long-term unemployed re-enter the mainstream labor market—although the programs have not been in place for very long (see Box).

3. Recent wage developments

Strong employment growth over the past two years has been accompanied by an acceleration in wage costs. Growth in average weekly ordinary time earnings for full-time adults (AWOTE) increased from 2 percent in 1992/93 to 4 percent in 1994/95,8 with private sector wage growth—particularly in manufacturing and infrastructure services—exceeding public sector wage growth (Table 7). In the 12 months to December 1995, AWOTE grew by just over 5 percent. Large wage settlements were negotiated during 1995 in certain key industries, including construction, metals, and transportation. This acceleration in wage growth, together with a slowdown in productivity growth since mid-1994, has resulted in an acceleration in unit labor costs which increased by 1 percent in 1994/95, but by 4½ percent in the 12 months to September 1995 (Table 8 and Chart 6).

Table 7.

Australia: Changes in Employees’ Average Awards and Weekly Earnings, 1990/91-1995/96

(Percent change from previous year)

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Sources: Australian Bureau of Statistics, National Accounts and Average Weekly Earnings: and Reserve Bank of Australia, Bulletin.

The difference between increases in award rates of pay and ordinary time earnings is commonly used as a measure of wage drift. However, differences may also reflect compositional and timing factors.

Deflated by the implicit price deflator for private final consumption expenditure.

Nonfarm wages, salaries, and supplements per nonfarm wage and salary earner.

CHART 6
CHART 6

AUSTRALIA NONFARM EARNINGS AND COSTS, 1984/85-1995/96

(Annual percent change)

Citation: IMF Staff Country Reports 1996, 037; 10.5089/9781451801934.002.A001

Source: Australian Bureau of Statistics.
Table 8.

Australia: Developments in Unit Labor Costs in the Nonfarm Sector, 1990/91-1995/96

(Percent change from previous year)

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Source: Australian Bureau of Statistics, National Accounts.

Ratio of gross nonfarm product to hours worked by all persons employed in the nonfarm sector at constant prices.

Calculated as nonfarm labor costs divided by nonfarm labor productivity.

Unit labor costs divided by the nonfarm GDP deflator.

Average 1989/90 = 100.0.

Australia: The Working Nation Policy Package

The Working Nation policy package, unveiled in May 1994, is a comprehensive four-year program consisting of employment, education, and training measures aimed at helping the unemployed—particularly the long term unemployed and those in danger of becoming so—re—enter the work force. The budgetary cost of phasing in the package is estimated to be around $A 7 billion. The five main elements of the program are:

  • The Job Compact, which offers a 6-12 month job placements, primarily in the private sector, to all those who have been on unemployment allowances for more than 18 months. Participating employers are paid a wage subsidy of $A 100-$A 230 a week for a period of 13-26 weeks, depending on the classification of the unemployed job seeker, as well as a bonus if they retain the worker for more than three months after the wage subsidy ceases. The job seekers, on their part, are obliged to accept any reasonable placement or lose access to unemployment benefits for a period of time, ranging from 2-6 weeks.

  • Reform of labor market assistance, through the introduction of comprehensive case management, tailored to meet the individual needs of the long-term unemployed and those at risk of joining their ranks.

  • The Youth Training Initiative, which consists of intensive case management, job/training placements, and new income support arrangements aimed at helping those under the age of 18 obtain suitable work, training, or education, Young people participating in this program are paid a Youth Training Allowance.

  • An expanded entry level training system with a greater level of industry involvement in decision making than existed previously, particularly through the Australian Vocational Training System arrangements.

  • The National Training Wage initiative, under which firms may hire unemployed job seekers at below-award wages, in return for providing–for at least one day a week–approved, portable training leading to formal qualifications. Workers with trade-related skills will receive a wage of $A 333 a week (equal to 80 percent of the minimum, award rate set by the Australian Industrial Relations Commission (AIRC) for trades-level workers); semi-skilled workers will receive $A 315 a week; and unskilled workers $A.270 a week. Training wages for young people range from $A 125 to $A 333 per week, depending on: the level of schooling they completed; the number of years since they school and the work experience gained in that time; and the amount and type of training they are undertaking.

  • In late 1995, several details of the Working Nation package were altered to focus more on those at risk of entering long term unemployment: wage subsidies were reintroduced for firms employing those who had been out of work for 6-12 months; wage subsidies were increased for firms employing—for 20 weeks—long-term unemployed persons; companies were allowed to take 50 percent of some wage subsidies as a lump sum if a quarter of their eligible employees had been unemployed for more than 18 months; subsidy rates were streamlined into broader categories; and higher payments were promised to employers for traineeships and apprenticeships.

Since 1983, wage setting and industrial relations in Australia have been dominated by a number of Accord agreements negotiated between the Labour Government and the ACTU.9 In the latest Accord VIII agreement unveiled in June 1995, the unions committed—for the first time—to incorporate the Reserve Bank’s inflation target explicitly into their wage demands10 in return for the Government’s commitment to create 600,000 new jobs over the next three years. The latest Accord agreement also provided for three further “safety net” pay rises-ranging from $A 9-$A 14 per week over the next three years—for award employees unable to secure pay rises under the new enterprise bargaining system.11 The safety net pay rises will be additional to those negotiated under the previous Accord which end in March 1996, but will be linked to improvements in productivity through the inclusion of enterprise flexibility clauses, facilitative provisions, and majority clauses.12

4. Industrial relations and labor market reform

In the late 1980s, the Australian Government embarked on a process of industrial relations reform with the aim of improving the productivity and flexibility of the labor market. The chosen approach was a gradual one, incorporating changes within the framework of the existing Accord agreements that had shaped labor market policy in the country for more than a decade.13

The main thrust of the labor market reform was to shift away from the centralized wage fixing entrenched in the award system toward wage bargaining at the enterprise level. At the same time, it was envisaged that the existing award system—which set a range of minimum wage rates based on skills and duties, together with a comprehensive package of minimum employment entitlements—would be retained as a “safety net” to underpin the new system of enterprise bargaining.

The first elements of enterprise bargaining appeared in the Accord III agreement in 1987, when across-the-board inflation-indexed wage increases were abandoned in favor of a two-tiered system of wage fixing linking wage increases with productivity improvements at the enterprise level.14 A formal enterprise bargaining framework was specified in the terms of Accord VI in 1990 and given effect in the terms of the Enterprise Bargaining Principle (EBP) introduced by the AIRC in 1991.15 Two years later, the Enterprise Awards Principle—which provided for AIRC arbitration as the “last resort” if parties were unable to agree on all terms of an enterprise agreement—replaced the EBP in a revised set of wage-fixing principles.

Steps were also taken on the legislative front to support and encourage the spread of enterprise bargaining. The 1988 Industrial Relations Act provided for unions and employers to reach enterprise-specific “certified agreements” on wages and conditions, notwithstanding the general wage fixing principles, as long as these agreements were deemed by the AIRC to be in the “public interest” Practical difficulties in meeting these criteria resulted in the slow adoption of certified agreements, and led to an amendment of the Act in 1992 to simplify the provisions for such agreements. Under the new arrangements, certified agreements applying to a single business only have to meet a “no disadvantage” test, that is, they cannot result in the aggregate reduction of entitlements or protection of those employees under an award. To facilitate the spread of enterprise bargaining to nonunionized workplaces, “enterprise flexibility agreements” (EFAs) were introduced in the 1993 Industrial Relations Reform Act (ERRA) by which nonunionized and partially unionized companies with federal award coverage could formalize agreements directly with their employees.16 At the same time, however, the IRRA strengthened the award safety net, requiring the AIRC to review federal awards every three years, although an effort was made to distinguish between the award safety net and bargaining streams by prohibiting the application of the terms of an agreement to any other award, except under special circumstances.

The spread of enterprise bargaining in the federal jurisdiction, which steadily increased after formal agreements were introduced in 1991, accelerated after the IRRA took effect: over 1,450 federal agreements were formalized during 1994 and over 2,000 during 1995. More than half of all wage and salary earners under federal awards are now covered by a formal federal agreement; the average length of such agreements is 18 months. By contrast, only about 100 EFAs have been concluded to date.

IV. Public Finances

1. Overview

The public sector borrowing requirement (PSBR)17 deteriorated sharply in the early 1990s, reaching a peak of 4¾ percent of GDP in 1991/92 (Table 9 and Chart 7). The deterioration reflected a weakening in both the Commonwealth and state general government sectors. At the Commonwealth level, this was attributable to the cyclical effects of the recession and to a significant discretionary policy easing, as taxes were cut and expenditure raised to cushion the impact of the downturn and then to spur the recovery. At the state level, the cost of rescuing several large state-owned financial institutions compounded the impact of the slowdown in activity on revenues, and resulted in a deterioration in the states’ fiscal position. Since the early 1990s, the P SBR has improved slowly, declining to 1¾ percent of GDP in 1994/95. This improvement has mainly been due to fiscal consolidation at the state and local general government level, where the net financing requirement (NFR) declined from 2 percent of GDP in 1991/92 to zero in 1994/95. Although the Commonwealth budget balance also improved, this was attributable mainly to cyclical factors (Chart 8). To address the structural deterioration in the Commonwealth fiscal position that occurs in the early 1990s, the Government announced in the 1995/96 budget its intention to move the fiscal position to broad balance in 1995/96.

Table 9.

Australia: Public Sector Borrowing Requirement (PSBR), 1985/86-1995/96 1/

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Source: Australian Bureau of Statistics, Government Financial Estimates Australia, 1995/96.

A negative value indicates a surplus. Totals do not add up owing to differences in the timing of recording of payments and receipts, as well as unresolved errors and omissions in intersector transactions (such as grants, subsidies, and advances).

Nonfinancial government business enterprises.

Estimates based on 1995/96 Commonwealth and State Government budgets.

CHART 7
CHART 7

AUSTRALIA PUBLIC SECTOR FINANCING, 1984/85-1995/96 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 1996, 037; 10.5089/9781451801934.002.A001

Source: Australian Bureau of Statistics.1/ 1995/96 data are budget estimates.
CHART 8
CHART 8

AUSTRALIA COMMONWEALTH BUDGET BALANCE, 1984/85-1995/96 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 1996, 037; 10.5089/9781451801934.002.A001

Sources: Commonwealth Treasury of Australia, various budget statements.1/ 1995/96 data are budget estimates.

Recent deficits have again seen an increase in public sector gross debt from 37¼ percent of GDP in 1989/90 to just over 44 percent of GDP in 1994/95. The Commonwealth government debt stands at 24¾ percent of GDP, still relatively low by industrial country standards.18

2. The Commonwealth budget

a. Recent budgetary developments

The Commonwealth Government used fiscal policy as a countercyclical policy instrument, when needed, while maintaining a medium-term focus aimed at reducing the average level of the deficit over time.19 Thus, the budget swung from a surplus of ½ percent of GDP in 1990/91 to a deficit of 3½ percent of GDP in 1992/93, reflecting both the direct impact of the recession on revenues and expenditures and significant discretionary policy decisions aimed at supporting growth in output and employment (Table 10). Over the past two years, the deficit has fallen slowly, reaching 2½ percent of GDP in 1994/95. Estimates made by the staff indicate that a deterioration in the structural budget position accounted for around three fourths of the weakening in the overall Commonwealth budget position from 1990/91 to 1992/93 (Table 11). Since 1992/93, there has been little change in the structural budget position which is estimated to have remained in a deficit of around 2½ percent of GDP.

Table 10.

Australia: Commonwealth Government Budget, 1990/91-1995/96

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Source: Australian Treasury, various budget statements.

No other detail available.

Table 11.

Australia: Structural Budget Calculations, Commonwealth and Consolidated General Government, 1983/84-1995/96

(In percent of GDP)

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Sources: Australian Treasury and Australian Bureau of Statistics for actual data; and staff estimates for structural balance calculations.

A positive number indicates a surplus.

Excludes asset sales and advanced capital repayments.

The budget balance of the consolidated general government sector differs from the PSBR reported in Table 9 due to the exclusion of provisions.

Excludes only Commonwealth asset sales.

The structural deterioration in the budget balance over the first half of the 1990s reflected policies that resulted in both revenue losses and expenditure increases. On the revenue side, policy measures included cuts in personal income tax rates in the 1990/91 and 1993/94 budgets.20 Corporate tax rates were reduced from 39 percent to 33 percent in 1993/94, more favorable depreciation allowances for certain large new investment projects and a general investment allowance ware introduced, and the sales tax on passenger motor vehicles lowered. However, the 1993/94 budget also began to reverse some of the structural deterioration in the revenue position by announcing increases in wholesale sales tax and excise duty rates (immediate increases were made and further rises announced for 1994 and 1995).21 On the expenditure side, the Government introduced several large-scale expenditure programs. Thus, the “One-Nation” program, announced in mid-1992, contained increased spending for infrastructure, transfer payments to families, and training. The “Working Nation” program of May 1994 announced some $A.7 billion in additional spending on labor market programs over a 4-year period aimed particularly at reducing long-term unemployment.

As a consequence of the weakening in activity and the discretionary policy actions, Commonwealth budget revenues declined from 26 percent of GDP in 1990/91 to 23½ percent of GDP in 1993/94 (Table 12 and Chart 9). The decline in revenues over this period was mainly the result of weaker direct tax collections which account for about three fourths of all tax revenues. Individual income tax receipts declined from 13¼ percent of GDP in 1990/91 to 11¾ percent of GDP in 1993/94.22 This decline was partly due to weaker “pay-as-you-earn” collections as wage and employment growth weakened, but also due to a sharp decline in other individual taxes (mainly unincorporated enterprises) which fell from 2¼ percent of GDP in 1990/91 to a low of 1 percent of GDP in 1992/93, before recovering somewhat in 1993/94. Company taxes declined from 3¾ percent of GDP in 1990/91 to 3 percent of GDP in 1993/94 due to a sharp decline in corporate profitability during this period, as well as the tax initiatives discussed above. Indirect tax collections weakened from 6¾ percent of GDP in 1990/91 to 6 percent of GDP in 1993/94. Nontax revenues increased slightly, with an increase in dividends paid to the Government by the Reserve Bank largely offset by declining interest revenues due to the change in state and PTE financing arrangements.23 Revenues increased by about ¾ percentage point of GDP (to 24½ percent of GDP) in 1994/95. Tax revenues rose by 1¼ percent of GDP, with increases in all major categories, but nontax revenues declined by ½ percent of GDP due to lower receipts of interest payments and dividends from the Reserve Bank.

Table 12.

Australia: Commonwealth Budget Revenue, 1990/91-1995/96

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Source: Australian Treasury, Budget Statement, 1995/96.
CHART 9
CHART 9

AUSTRALIA COMMONWEALTH REVENUES, 1984/85-1995/96 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 1996, 037; 10.5089/9781451801934.002.A001

Sources: Commonwealth Treasury of Australia, various budget statements.1/ 1995/96 data are budget estimates.

Expenditures rose from 25½ percent of GDP in 1990/91 to 27¼ percent of GDP in 1992/93, and declined only slightly to 26¾ percent of GDP in 1994/95 (Tables 13-15, and Chart 10). Most of the growth occurred in spending on social security and welfare unemployment benefit payments. Although unemployment benefit payments began to decline (as a ratio to GDP) with the decline in the unemployment rate in 1993/94, other welfare payments continued to rise so that overall expenditure on social security and welfare remained around 9½ percent of GDP in 1994/95, about the same as in 1992/93. The increase in welfare expenditure has mainly been concentrated in payments to families with children. Over the period 1990/91-1994/95, other major areas where expenditure increased are: labor and employment with the introduction of labor market programs for the long-term unemployed ½ percent of GDP); health (½ percent of GDP); and education (¼ percent of GDP). These increases were partly offset by a decline in assistance to state governments (½ percent of GDP).

Table 13.

Australia: Commonwealth Budget Expenditures, 1990/91-1995/96

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Source: Australian Treasury, Budget Statement, 1995/96.
Table 14.

Australia: Commonwealth Budget Expenditures by Function, 1990/91-1995/96

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Source: Australian Treasury, Budget Statement, 1995/96.

Specific purpose transfers from the Commonwealth to the rest of the public sector are included in their respective function.

Table 15.

Australia: Commonwealth Government Public Debt Interest, 1984/85-1994/95

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Source: Australian Treasury, various budget statements.
CHART 10
CHART 10

AUSTRALIA COMMONWEALTH EXPENDITURES, 1984/85-1995/96 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 1996, 037; 10.5089/9781451801934.002.A001

Sources: Commonwealth Treasury of Australia, various budget statements.1/ 1995/96 data are budget estimates.

b. The 1995/96 budget

The 1995/96 budget announced an acceleration of the Government’s fiscal consolidation plan aimed at bringing the budget from a deficit of 2½ percent of GDP in 1994/95 to a slight surplus of 0.1 percent of GDP in the current fiscal year. Revenues were expected to increase to around 25¼ percent of GDP in 1995/96, while expenditures (which include asset sales as negative capital expenditure) were projected to decline to 25 percent of GDP. The improvement in the budget position was expected to result from a combination of cyclical and structural factors, including: asset sales (mainly the Commonwealth Bank and Qantas) and advance capital repayments to the Government24 (total yield about 1½ percent of GDP); measures announced in previous budgets for implementation in 1995/96, including a second round of wholesale sales tax increases and the bringing forward of company tax payments (total yield equivalent to about ½ percent of GDP); new structural measures announced in the 1995/96 budget, most importantly, an increase in the company tax rate from 33 percent to 36 percent (½ percentage point of GDP); and, finally, a small cyclical boost, mainly related to the strength of the economy in 1994/95 and the lag in the payment of company taxes.

However, in its midyear budget review (published on December 21,1995), the Government reduced the projected 1995/96 surplus from the original $A 718 million to $A 115 million. Revenues are expected to be slightly below the original budget due to weaker economic conditions and the blocking of some tax legislation in the Senate. On the expenditure side, the impact of additional expenditure decisions and weaker growth will be partly offset by a large (one-off) capital repayment ($A 1.9 billion) from the State of Victoria Staff estimates indicate that the structural budget position will improve by around ¾ percent of GDP in 1995/96 to a deficit of 1½ percent of GDP.

3. State and local governments

The NFR of the state and local general government sector rose to a cyclical peak of 2 percent of GDP in 1991/92 (Chart 11).25 This was due to the impact of slow economic growth and declining inflation, particularly asset price inflation, cm the growth of own-source revenues, and a rising level of expenditure, partly due to large payments associated with financial difficulties in some state government-owned financial institutions. The fiscal difficulties experienced over this period resulted in the downgrading of a number of states by international credit rating agencies and led most to implement fiscal consolidation strategies with the aim of stabilizing the fiscal position and reducing the outstanding stock of net debt. This has resulted in a significant improvement in the fiscal position, with the NFR of the general government sector broadly zero over the past two years. The overall NFR of the state and local government sector has averaged a surplus of ½ percent of GDP over the past two years, reflecting the improved performance of the PTE sector (see next section).

CHART 11
CHART 11

AUSTRALIA STATE AND LOCAL GENERAL GOVERNMENT FINANCES, 1984/85-1994/95

(In percent of GDP)

Citation: IMF Staff Country Reports 1996, 037; 10.5089/9781451801934.002.A001

Source: Australian Bureau of Statistics.

The consolidation strategies followed by the various states have had a number of common features: growth in current outlays have been reduced in the context of improving the efficiency of public sector service delivery; privatization programs have been initiated, particularly of state-owned financial enterprises; PTEs have been put on a more commercial footing, subsidies reduced, and dividends paid to the governments increased; and, in some cases, new revenue measures have been introduced, including higher gambling taxes, casino licenses, and greater user pays and cost recovery principles.

Significant fiscal benefits have been derived from the implementation of this comprehensive reform strategy. Combined expenditure of the state general government sector declined from a peak of 18 percent of GDP in 1991/92 to around 16¼ percent of GDP in 1994/95. Within this, current expenditures have fallen by about 1 percent of GDP to 14¼ percent of GDP. Capital expenditures have fallen by a similar amount, although this partly reflects the inclusion of asset sales as negative capital expenditure. Revenues as a percentage of GDP have remained broadly unchanged at around 16¾ percent of GDP. However, within this, own-source revenue has continued to rise, while grants from the Commonwealth—particularly general purpose grants—have continued to decline.

The fiscal consolidation that has occurred at the state level in recent years has resulted in an improvement in the structural budget position of the consolidated general government sector despite the lack of progress at the Commonwealth level. Staff estimates indicate that after deteriorating to 3 percent of GDP in 1991/92, the consolidated general government structural deficit narrowed to 1¾ percent of GDP in 1994/95. It is expected to narrow further to a deficit of ½ percent of GDP in 1995/96.

4. Nonfinancial government business enterprises

Since the late 1980s, the nonfinancial PTE sectors at both the Commonwealth and state and local government levels have undergone substantial reform aimed at making them more efficient and commercially oriented in their operations, as well as more accountable for their financial performance (Table 16 and Chart 12). These efforts have been supported by substantial structural and regulatory reforms in a number of industries, most notably transportation (particularly air and rail, but also some progress in shipping), telecommunications, and electricity, which have aimed at creating more competitive industries.

Table 16.

Australia: Nonfinancial Government Business Enterprises’ Operations, 1990/91-1994/95

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Source: Data provided by the Australian Bureau of Statistics.

The net financing requirement is equal to the total deficit less net advances received.

Net operating surplus less subsidies received plus net interest receipts.

CHART 12
CHART 12

AUSTRALIA GOVERNMENT BUSINESS ENTERPRISES’ OPERATIONS, 1984/85-1994/95

(In percent of GDP)

Citation: IMF Staff Country Reports 1996, 037; 10.5089/9781451801934.002.A001

Source: Australian Bureau of Statistics.

The impact of the reforms on the performance of the PTE sector has been quite significant A recent report26 on the aggregate performance of 59 Commonwealth and state PTEs found that between 1989/90 and 1993/94: the operating sales margin rose from around 19 percent to 23 percent; real prices fell by 3 percent; payments to Government more than doubled in real terms; labor productivity increased by 67 percent; and employment declined by over 25 percent Partly as a consequence of the reforms introduced, but also due to lower capital expenditures, the NFR of the nonfinancial PTE sector has swung from a deficit of 1 percent of GDP in 1990/91 to an estimated surplus of ¾ percent of GDP in 1994/95.

V. Financial Sector Developments

1. Overview

Since 1993, the central focus of monetary policy has been the maintenance of medium-term price stability, with the Reserve Bank aiming to achieve an average underlying inflation rate of 2-3 percent over the course of the business cycle.27 With the acceleration in domestic demand increasing the risk of future inflationary pressures, monetary policy was tightened during the second half of 1994 with the official cash rate raised on three occasions to its current level of 7½ percent. Nevertheless, underlying inflation breached the 2-3 percent range in the third quarter of 1995 and remained above the target in the fourth quarter. After slowing sharply in the early 1990s, total credit growth has accelerated over the past two years, initially reflecting strong growth in home mortgage lending, which, during 1995, gave way to expansions in personal and business credit The growth of broad money has increased gradually since 1992, reaching 9 percent currently.

2. Monetary policy developments

Australia’s inflation objective was first enunciated in 1993, and was made more widely known in 1994 when the Governor of the Reserve Bank of Australia declared an average underlying inflation rate of “around 2-3 percent…over a run of years” to be a “reasonable” goal for monetary policy.28 The inflation objective is thought of as a desired “central tendency” for inflation, or a “thick point,” rather than a narrow “target band.” It is defined in terms of underlying inflation. However, the time frame over which this underlying inflation is to be measured and the acceptable extent and duration of deviations from the “central tendency” are not precisely specified.

Under this forward-looking framework, monetary policy is tightened if average inflation (over the entire cycle) is projected to overshoot the objective, and eased if it is projected to fall below the objective. The Reserve Bank implements monetary policy by announcing its target for the official cash rate, which it achieves through open market operations in the domestic money and securities markets.

3. Interest rate developments

Long-term interest rates came under upward pressure during most of 1994, although the trend was partially reversed in 1995 (Table 17 and Chart 13). When global interest rates picked up in early 1994, led by the monetary tightening in the United States, Australian bond yields followed suit, rising from around 6½ percent in the beginning of 1994 to 9¾ percent by the middle of that year. The differential between Australian and U.S. bond yields widened substantially, from a low of around 70 basis points in early 1994 to about 250 basis points in mid-1994—this was attributed mainly to higher inflationary expectations in Australia, a legacy of the poor inflation performance over the late 1970s and 1980s (Chart 14).

Table 17.

Australia: Selected Interest Rates, 1985/86-1995/96

(In percent per annum; at or near end of month)

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Source: Reserve Bank of Australia, Bulletin.

Daily 11 a.m. call rate.

Weighted average yield of notes alloted at last tender of the month.

Estimated closing yields on last business day of the month.

New South Wales Treasury Corporation assessed secondary market yields.

Predominant or representative rates offered by banks.

Rate on account with balance of $A 10,000 or over.

Rate shown is for large businesses.

Standard variable rate loans of large banks on new housing loans to individuals. Prior to April 1986, rates were subject to a maximum; from March 1982, this was 13.5 percent per annum. The maximum on loans existing or approved before April 3, 1986 was retained.

Ninety-day yield; average of daily market yields for the week ended the last Wednesday of the month.

Weighted average net yield to unit holders for month shown.

CHART 13
CHART 13

AUSTRALIA INTEREST RATES, 1984/85-1995/96

(In percent)

Citation: IMF Staff Country Reports 1996, 037; 10.5089/9781451801934.002.A001

Source: Reserve Bank of Australia, Bulletin..1/ Yield on 10-year bonds less the 12-month ended change in consumer price inflation.
CHART 14
CHART 14

AUSTRALIA INTEREST RATE SPREADS, 1984/85-1995/96

(In percent)

Citation: IMF Staff Country Reports 1996, 037; 10.5089/9781451801934.002.A001

Sources: Reserve Bank of Australia, Bulletin; and IMF, International Financial Statistics.1/ 10-year government bond yield minus the 90-day bank bill rate.2/ Australian interest rates less U.S. interest rates.

The rise in long-term interest rates led to a pronounced steepening of the (positively sloped) yield curve. By mid-1994, more vigorous employment growth and emerging signs of accelerating economic activity in Australia fueled increases in short-term market interest rates, as the markets anticipated a monetary tightening. The tightening occurred in August 1994, when the official cash rate—which had been held at 4¾ percent for almost a year—was raised by three fourths of a percentage point. This was followed by subsequent increases of 1 percentage point in both October and December 1994. By the end of 1994, the yield curve had risen and flattened somewhat—long-term yields were around 10¾ percent, while the cash rate was at 7½ percent-although with lingering concerns over the inflationary outlook, it was still more positively sloped than in most other industrial countries.

In early 1995, however, Australian bond yields began to fall, mirroring the global bond market rally. The yield curve moved down and flattened over the course of 1995; at end-1995, long-term interest rates were 8½ percent, with 90-day bill yields around 7½ percent.

4. Longer-term developments in private debt

Corporate sector debt more than doubled during the 1980s from around 27 percent of GDP in 1980/81 to a peak of 68 percent of GDP in 1989/90 (Chart 15). It has since fallen to around 54 percent of GDP. The increase in corporate debt can be linked to the increased availability of funds (both domestic and foreign), following the financial deregulation in the first half of the 1980s. The deregulation had two important effects on the supply of credit: first, it left banks free to set interest rates and determine the growth and allocation of their balance sheets; second, it increased competition in the banking industry by encouraging new entrants (both domestic and foreign).29 Both of these factors made access to debt finance easier. On the demand side, strong business profitability and a high level of confidence encouraged businesses to take on debt finance. This was enhanced by the favorable tax treatment of debt finance and other nonneutralities in the tax system which encourage the geared acquisition of real assets, particularly in times of higher inflation. However, the sharp increase in interest rates beginning in 1989, together with the high levels of debt that had been built up, resulted in debt-servicing costs rising to an unsustainable level in the early 1990s. Subsequently, companies made a major effort to reduce their debt levels by restructuring their balance sheets.

CHART 15
CHART 15

AUSTRALIA CORPORATE AND HOUSEHOLD SECTOR DEBT, 1980/81-1994/95

(In percent of GDP)

Citation: IMF Staff Country Reports 1996, 037; 10.5089/9781451801934.002.A001

Source: Reserve Bank of Australia.

Deregulation initially did not have a significant impact on the household sector as banks concentrated their lending activities in the corporate sector, and household debt remained broadly unchanged until the late 1980s at, or around, 30 percent of GDP. However, with the collapse of corporate borrowing in the early 1990s, banks looked more to residential housing as a safe and profitable lending area. Together with the favorable fundamentals from low mortgage interest rates, this saw the level of household debt increase to 44 percent of GDP by 1994/95.

5. Developments in credit and monetary aggregates

Private sector credit accelerated during the first half of the 1990s, reflecting trends in real economic activity. Thus, after contracting slightly during 1991/92, the stock of total private sector credit grew by about 2 percent in 1992/93, 7 percent in 1993/94, and 10 percent in 1994/95 (Table 18 and Chart 16). The pickup in credit demand was led by the housing sector, fueled by declines in mortgage interest rates, and by competition among banks and other financial institutions. Growth in housing credit slowed significantly over the course of 1995 as the housing cycle weakened, giving way to stronger growth in personal credit (mainly loans for the purchase of motor vehicles). Business credit, which declined sharply in the early 1990s as businesses restructured their balance sheets by repaying debt, began to recover in 1993 as profits rose, reaching 11¼ percent in the year to December 1995.

Table 18.

Australia: Credit Aggregates, 1992/93-1995/96 1/

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Source: Reserve Bank of Australia, Bulletin.

The data shown for banks are averages of weekly (Wednesday) figures. Figures for NBFIs are averages of end-month figures (current and previous month). There are breaks in the data series for NBFIs and all financial intermediaries owing to changes from time to time in the number of reporting institutions.

Loans, advances, and bills held.

Holdings of Commonwealth Government, local and semigovernment, and other public authority securities.

Credit is equal to Bank bills outstanding plus loans and advances by financial intermediaries whose liabilities are included in broad money.

Residual item. Includes all Bank bills outstanding.

CHART 16
CHART 16

AUSTRALIA MONEY AND CREDIT AGGREGATES, 1984/85-1995/96

(Annual percent change)

Citation: IMF Staff Country Reports 1996, 037; 10.5089/9781451801934.002.A001

Source: Reserve Bank of Australia, Bulletin.

The strengthening in private sector credit has also been reflected in the growth of broad money,30 which rose from 1½ percent in the year to December 1992 to 9 percent in the year to December 1995 (Table 19). By contrast, M3 has remained relatively stable over the past three years. The growth rates of broad money and M3 are currently roughly in line with nominal GDP growth, but lower than total credit growth as the financial intermediaries have funded much of their lending from capital rather than through borrowing. M1 growth has slowed from around 24½ percent (12-month rate) in September 1992 to only 2¾ percent in September 1995. This may be partly explained by the small increase in interest rates on transaction accounts compared to fixed-term deposit accounts (rates on the former increased by only about 1 percentage point compared to 2¾ percentage points in the latter between June 1994 and June 1995).

Table 19.

Australia: Money Supply, 1992/93-1995/96 1/

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Sources: Reserve Bank of Australia, Bulletin; and data provided by the Reserve Bank of Australia.

Figures for currency and bank deposits are average of weekly (Wednesday) data. Figures for borrowings by NBFIs are averages of end-month figures (current and previous month).

The monetary base is the stock of reserve money, consisting of currency outside the Reserve Bank, banks’ deposits with the Reserve Bank, and Reserve Bank liabilities to the nonbank private sector.

Currency and current deposits with banks.

M1 plus other bank deposits.

Borrowings (other than from banks and related corporations) by permanent building societies, credit cooperatives, authorised money market dealers, pastoral finance companies, cash management trusts, finance companies, general financiers, and money market corporations.

M3 plus borrowings from the private sector by NBFIs less the letter’s holdings of currency and bank deposits.

VI. External Developments

1. Overview

The current account deficit narrowed in the recession of the early 1990s, reaching a low of 3 percent of GDP in 1991/92 as import volumes declined and export volumes grew strongly, particularly in the manufacturing sector (Table 20 and Chart 17). However, the deficit widened to 3¾-4 percent of GDP in 1992/93-1993/94, as the recovery in domestic demand led to an acceleration in imports (which more than offset the continued robust growth in exports) and a declining net income deficit In 1994/95, the deficit rose sharply, to nearly 6 percent of GDP, reflecting a continued acceleration in import volumes and a drought-induced decline in rural export volumes. However, monthly data for the first half of 1995/96 suggest that the deficit has now peaked, with total import growth slowing somewhat, rural export volumes recovering, and commodity export prices strengthening.

Table 20.

Australia: Balance of Payments Summary, 1990/91-1995/96

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Source: Australian Bureau of Statistics, Balance of Payments Australia.

Quarterly current account data are seasonally adjusted.

A minus sign indicates an increase in reserves.

Period average, excluding Brazil, 1985=100; real effective exchange rate is CPI based on relative consumer prices.

CHART 17
CHART 17

AUSTRALIA EXTERNAL CURRENT ACCOUNT, 1984/85-1995/96

(In percent of GDP)

Citation: IMF Staff Country Reports 1996, 037; 10.5089/9781451801934.002.A001

Source: Australian Bureau of Statistics.1/ Includes net transfers.

The composition of capital flows has varied significantly from year to year during the early 1990s. However, in contrast to the 1980s, which were characterized by significant net debt inflows, the composition of flows, on average, has been more evenly balanced between debt and equity, with each accounting for about one half of total financing. Nonofficial capital inflows have declined since the early 1990s, but official capital inflows have risen, mainly due to the borrowing activities of the state governments.31 Reflecting the continued large current account deficits, the stock of net external liabilities has continued to rise, but as a consequence of the shift toward equity financing, the net external debt stock has declined modestly over the past two years and stood at 40 percent of GDP at end-1994/95.

2. Merchandise trade

The merchandise trade balance has been the main driving force behind developments in the current account deficit in recent years (Table 21). After recording a surplus of 1 percent of GDP in 1991/92, the trade account was in approximate balance in 1992/93 and 1993/94, but moved sharply into a deficit of 1¾ percent of GDP in 1994/95.

Table 21.

Australia: Current Account, 1990/91-1995/96 1/

(In millions of Australian dollars)

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Source: Australian Bureau of Statistics, Balance of Payments Australia.

Quarterly data are seasonally adjusted.

The strength of import demand was the most important single factor underlying the deterioration in the merchandise trade balance (Table 22 and Chart 18). In the early stages of the recovery, when business investment was still weak, this was led by growth in imports of consumer and intermediate goods. However, as domestic demand—and private investment in particular—strengthened, imports of capital goods rose strongly. As a result, total import volume, which contracted in 1990/91, recovered in 1991/92, grew by nearly 8¾ percent per annum in 1992/93-1993/94, and then surged by 20 percent in 1994/95, when imports of capital goods jumped by over 35 percent.

Table 22.

Australia: Merchandise Exports and Imports, 1990/91-1995/96 1/

(Percent change from previous year)

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Source: Australian Bureau of Statistics, Balance of Payments Australia.

Quarterly data are seasonally adjusted.

Implicit price deflators.

Merchandise trade.

CHART 18
CHART 18

AUSTRALIA IMPORT VOLUME DEVELOPMENTS, 1984/85-1995/96

Citation: IMF Staff Country Reports 1996, 037; 10.5089/9781451801934.002.A001

Source: Australian Bureau of Statistics.

Robust growth in trading partner countries provided a conducive climate for exports in 1991/92, which increased by 9¾ percent in volume terms, but only by 5¼ percent in value terms, given a 4 percent decline in export prices. Export volume growth slowed in 1992/93 as increased competitiveness from a significant depreciation in the real effective exchange rate was offset by weaker activity in trading partner countries, but then recovered to rise by 9¼ percent in 1993/94. Export volume growth fell to just 2 percent in 1994/95, reflecting a drought-induced decline in rural export volumes.

Two particularly noticeable developments in Australia’s export performance in recent years have been the rapid growth in manufactured exports and the increasing importance of exports to the Asian region. Since the mid-1980s, growth in manufactured export volumes has averaged 14 percent per annum, and manufactured goods now account for 26½ percent of all merchandise exports compared to 12¾ percent in 1984/85 (Table 23 and Chart 19). Exports to ASEAN countries now account for 15¼ percent of all merchandise exports, compared to 8¾ percent in 1988/89 (Table 24). The largest single market for Australian goods is Japan, which accounted for 24¼ percent of total merchandise exports in 1994/95. Other important markets are Korea, New Zealand, and the United States, which each account for 7-8 percent of merchandise exports.

Table 23.

Australia: Exports by Commodity Group, 1990/91-1994/95

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Source: Australian Bureau of Statistics, Balance of Payments Australia.
CHART 19
CHART 19

AUSTRALIA EXPORT VOLUME DEVELOPMENTS, 1984/85-1994/95

Citation: IMF Staff Country Reports 1996, 037; 10.5089/9781451801934.002.A001

Source: Australian Bureau of Statistics.
Table 24.

Australia: Direction of Trade, 1992/93-1994/95

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Source: Australian Bureau of Statistics, Exports and Imports, Australia: Trade with Selected Countries and Major Country Groups.

Trade statistics basis.

Association of South East Asian Nations, comprising Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand.

In addition to the impact of the improvement in Australia’s relative cyclical position on trade volumes, the trade balance was adversely affected by a 13½ percent deterioration in the terms of trade between 1990/91 and 1993/94. With commodity prices supported by stronger international growth, this deterioration was partly reversed in 1994/95 by a 5½ percent increase.

3. Invisibles

The invisibles balance has generally been characterized by a substantial net factor income deficit, a considerably smaller deficit on the net nonfactor services account, and a modest surplus on the transfers account Since the early 1990s, developments in the invisibles balance have continued to be dominated by factor income payments, particularly interest payments on the stock of external debt (Table 25). The deficit on the net income balance narrowed from 4 percent of GDP in 1990/91 (a record level) to 3½ percent of GDP in 1992/93, reflecting declining world interest rates and modest returns on foreign equity investments. Over the past two years, net interest payments have remained roughly stable, but earnings on equity investment in Australia have risen rapidly, reflecting the strong performance of the domestic economy, and the net income deficit widened to 4 percent of GDP in 1994/95 (Chart 20).

CHART 20
CHART 20

AUSTRALIA INVESTMENT INCOME, 1984/85-1994/95

(In percent of GDP)

Citation: IMF Staff Country Reports 1996, 037; 10.5089/9781451801934.002.A001

Source: Australian Bureau of Statistics.
Table 25.

Australia: Gross and Net External Interest Payments, 1990/91-1995/96

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Source: Australian Bureau of Statistics, International Investment Position Australia.

Data are not seasonally adjusted.

The net nonfactor services deficit declined from ¾ percent of GDP in 1990/91 to ¼ percent of GDP in 1994/95, mainly reflecting a strong increase in travel exports, but also growth in exports of business services. Net transfer receipts (public and private) have fallen from around ½ percent of GDP in the early 1990s to zero currently. This decline is mainly due to a change in immigration policy, which now gives greater emphasis to individual skills, rather than financial assets, as a determinant of eligibility.

4. Capital account and external liabilities

a. A longer-run perspective of capital flows

Australia has long been a net capital importer, reflecting its rich resource endowment, strong population growth, and large need for physical infrastructure. However, the decline in domestic saving over the course of the 1980s and early 1990s has seen a sharp deterioration in the current account deficit Together with the removal of capital controls,32 this has resulted in a significant shift in the size and composition of capital flows in the Australian economy as domestic residents have enjoyed greater access to foreign saving and wider investment opportunities.

Gross capital inflows and outflows increased significantly during the 1980s (Chart 21). After averaging ¾ percent of GDP in the 1960s and 1970s, gross capital outflows rose to an average of 2½ percent of GDP in the 1980s, peaking at 5½ percent of GDP in 1987/88. The increase in capital outflows, together with the deterioration in the current account deficit, resulted in a very large increase in capital inflows, which rose to an average of 7¼ percent, of GDP in the 1980s from 2¾ percent of GDP in the 1960s and 1970s.

CHART 21
CHART 21

AUSTRALIA CAPITAL FLOWS, 1961/62-1994/95

(In percent of GDP)

Citation: IMF Staff Country Reports 1996, 037; 10.5089/9781451801934.002.A001

Source: Australian Bureau of Statistics.

With the exception of a few years in the early 1970s, when official reserve assets of the Reserve Bank funded a significant part of the current account deficit, official capital flows were, on the whole, fairly insignificant until the 1980s.33 General government capital inflows were very small until the early 1980s (Chart 22). This reflected the relatively strong fiscal position and the limited need for, and access to, financing from international markets. Since then, the larger fiscal deficits run by the Government, together with the granting of direct access to international capital markets for the state governments,34 have resulted in general government net capital inflows at times accounting for a substantial proportion of total capital inflows.

CHART 22
CHART 22

AUSTRALIA OFFICIAL AND NONOFFICIAL NET CAPITAL FLOWS, 1961/62-1994/95

(In percent of GDP)

Citation: IMF Staff Country Reports 1996, 037; 10.5089/9781451801934.002.A001

Source: Australian Bureau of Statistics.

Net nonofficial capital flows increased in the early 1980s and averaged 4 percent of GDP over the decade as a whole, marked by significant increases in both gross inflows and outflows. After being fairly insignificant until the late 1970s, nonofficial net debt flows increased sharply in the 1980s accounting for all of the net capital inflows during the decade. Net equity nonofficial financing over this period was zero due to the increase in equity investment abroad offsetting the equity inflow.

Prior to the late 1970s, restrictions on overseas borrowing meant that most nonofficial capital inflows were in the form of equity investment, both direct and portfolio. Private debt flows, to the extent they existed, mostly related to borrowing by domestic subsidiaries from parent companies overseas (Chart 23). However, financial deregulation in the late 1970s resulted in a significant shift in financing patterns, with short-term portfolio borrowing becoming the dominant form of inflow during the 1980s (averaging 3½ percent of GDP over the decade). Equity investment in Australia declined sharply in the first half of the 1980s, but then recovered strongly in the second half of the decade as direct inflows rose strongly. The surge in portfolio borrowing in the early 1980s can be attributed to a combination of large mining projects during the resources boom at this period, and to public enterprise borrowing to finance large capital expenditure projects. This trend was continued by the corporate sector’s desire to increase its debt level. However, it should be noted that, following the deregulation of the financial sector, a significant proportion of these funds were raised offshore by the financial sector and then on-lent through the domestic market to the corporate sector. The removal of controls on capital flows fostered the development of significant offshore Australian dollar security markets. In the second half of the 1980s, the funds raised in offshore capital markets, particularly the Euro-$A market, were, in principle, sufficient to fund the whole of the current account deficit.35

CHART 23
CHART 23

AUSTRALIA NONOFFICIAL CAPITAL INFLOWS, 1961/62-1994/95

(In percent of GDP)

Citation: IMF Staff Country Reports 1996, 037; 10.5089/9781451801934.002.A001

Source: Australian Bureau of Statistics.

Nonofficial capital outflows, which had previously been negligible, increased to an average of 2 percent of GDP during the 1980s (Chart 24) as Australians sought to increase their investments offshore in response to the relaxation of prior controls on such activities. Direct equity investment abroad was particularly strong in the second half of the 1980s, as Australian companies acquired interests in foreign companies, mainly in the United Kingdom, the United States, and New Zealand.36 Portfolio flows also increased as institutional investors diversified their portfolios by acquiring foreign equity investments. Debt flows, both direct and portfolio, remained small.

CHART 24
CHART 24

AUSTRALIA NONOFFICIAL CAPITAL OUTFLOWS, 1961/62-1994/95

(In percent of GDP)

Citation: IMF Staff Country Reports 1996, 037; 10.5089/9781451801934.002.A001

Source: Australian Bureau of Statistics.

b. Developments in the 1990s

In contrast with the experience of the 1980s, the composition of capital flows in the first half of the 1990s has been more evenly balanced between debt and equity financing (Table 26 and Chart 25). During the first half of the 1990s, the average debt/equity financing ratio was 52/48. However, the split between debt and equity financing has been volatile, ranging from 89/11 in 1991/92 to 18/82 in 1993/94. The early 1990s were characterized by increasing net inflows of net official debt which rose to a peak of 3¾ percent of GDP in 1992/93. The driving force behind these movements was borrowing by the state governments, which have become a major borrower in the international capital markets, and developments in reserve assets. Declining reserve assets added 1 percent of GDP to net official inflows in both 1991/92 and 1992/93, but have been less of an influence since then.

Table 26.

Australia: Capital Account, 1990/91-1995/96

(In millions of Australian dollars) 1/

article image
Source: Australian Bureau of Statistics, Balance of Payments Australia.

Quarterly data are seasonally adjusted.

Includes accounts receivable and prepayments made.

Includes accounts payable and prepayments received.

CHART 25
CHART 25

AUSTRALIA EXTERNAL BALANCE, 1986/87-1995/96

(In billions of Australian dollars)

Citation: IMF Staff Country Reports 1996, 037; 10.5089/9781451801934.002.A001

Source: Australian Bureau of Statistics.1/ By nonofficial sector.

Nonofficial net capital inflows declined sharply in the first half of the 1990s, from 5 percent of GDP in 1990/91 to only ¼ percent of GDP in 1992/93. They recovered somewhat in 1993/94 (to 2¼ percent of GDP), but declined again in 1994/95. Within these totals, gross inflows and outflows have both fallen from the levels of the 1980s. As the corporate sector has sought to restructure its balance sheet, portfolio debt inflows have turned negative, averaging a repayment of ½ percent of GDP between 1992/93-1994/95, although the demand for financing from the household sector has meant that overseas borrowing by the financial sector has remained robust. With direct borrowing also declining, nonofficial net debt flows declined from 2 percent of GDP in 1990/91 to negative 1¾ percent of GDP in 1992/93, before recovering somewhat to negative ½ percent of GDP in 1994/95.

Although also variable, net equity flows have been relatively strong in the first half of the 1990s, averaging 2 percent of GDP per annum. Despite declining from the high levels of the late 1980s, inflows remained quite strong over this period. This was mainly due to a steady flow of direct investment, although in 1993/94, portfolio equity investment in Australia increased sharply to 3¾ percent of GDP. Direct equity investment abroad by Australians has declined from the levels of the late 1980s, while portfolio outflows have remained relatively small.

c. Implications for foreign debt and liabilities

The financing of the large current account deficits since the beginning of the 1980s has resulted in a significant increase in the outstanding stock of net foreign liabilities (Chart 26). Given the significant increase in debt financing, the stocks of gross and net debt have risen fester than the stock of liabilities as a whole.

CHART 26
CHART 26

AUSTRALIA EXTERNAL LIABILITIES, 1980/81-1994/95

(In percent of GDP)

Citation: IMF Staff Country Reports 1996, 037; 10.5089/9781451801934.002.A001

Source: Australian Bureau of Statistics.

Australia’s net foreign liabilities rose from 23¼ percent of GDP in 1980/81 to 46 percent of GDP in 1989/90, while net foreign debt increased from 6 percent of GDP to 35½ percent of GDP over the same period. Net foreign liabilities have risen further in recent years reaching 57¼ percent of GDP in 1994/95. After peaking at 41½ percent of GDP in 1992/93, net foreign debt declined somewhat to 40 percent of GDP by 1994/95, owing partly to valuation effects of the Australian dollar’s appreciation over this period (Table 27). Gross foreign debt amounted to 49¼ percent of GDP ($A 223 billion) in 1994/95. The official reserves of the Reserve Bank ($A 20 billion at end-1994/95) accounted for a little under one half of Australia’s holding of foreign debt assets (Table 28).

Table 27.

Australia: External Assets and Liabilities, 1990/91-1995/96 1/

article image
Source: Australian Bureau of Statistics, International Investment Position Australia.

Excluding accounts receivable and payable.

Quarterly data are seasonally adjusted.

Table 28.

Australia: Gross Official Reserve Assets, 1990/91-1995/96

(In millions of Australian dollars; end of period)

article image
Source: Reserve Bank of Australia, Bulletin.

Gold is valued at the average London gold price for the month, converted to Australian dollars at the market rate of exchange applying on the last day of the month.

Includes sales and purchases of, and earnings on, foreign exchange by the Reserve Bank and certain transactions with official institutions overseas.

Converted at end-period exchange rates.

As highlighted earlier, much of the increase in debt during the 1980s was attributable to the private sector. Chart 27 provides a breakdown of gross external debt between the official sector, public enterprise sector, and the private sector (both financial and trading enterprises). Private gross external debt rose from 5 percent of GDP in 1979/80 to a peak of 29 percent of GDP in 1991/92, but has since declined to 27 percent of GDP. In 1994/95, private debt accounted for 55 percent of total gross external debt (and 60 percent of total net external debt).

CHART 27
CHART 27

AUSTRALIA GROSS EXTERNAL DEBT BY SECTOR, 1980/81-1995/96

(In percent of GDP)

Citation: IMF Staff Country Reports 1996, 037; 10.5089/9781451801934.002.A001

Sources: Australian Bureau of Statistics and Reserve Bank of Australia.

The currency composition of the foreign debt has shifted significantly over the past decade (Table 29 and Chart 28), with the proportion of foreign debt denominated in Australian dollars almost doubling between 1985/86 and 1994/95. Debt denominated in U.S. dollars has declined over this period (44¼ percent of the total to 36¼ percent), and debt in other foreign currencies has fallen from 20¼ percent to 7 percent of the total The maturity profile of the foreign debt domiciled abroad has also shortened considerably, with the proportion of debt maturing in less than one year more than doubling from 19¼ percent in 1985/86 to 42¼ percent in 1994/95. Banks, in particular, have been large borrowers of short-term funds.

Table 29.

Australia: Maturity Structure and Currency Composition of Gross External Debt, 1990/91-1995/96

(Percent of total debt)

article image
Source: Australian Bureau of Statistics, International Investment Position Australia.

Data relate only to debt identified by institutional sector.

Includes the effect of lending by direct investment enterprises to their foreign parent companies.

CHART 28
CHART 28

AUSTRALIA COMPOSITION AND MATURITY OF EXTERNAL DEBT

(In percent of total debt outstanding)

Citation: IMF Staff Country Reports 1996, 037; 10.5089/9781451801934.002.A001

Source: Australian Bureau of Statistics.

5. Exchange rate developments

Both the nominal and real effective exchange rates depreciated sharply between 1991/92 and 1993/94 (by 10¾ percent and 14¼ percent, respectively) (Table 30 and Chart 29). The depreciation of the real effective exchange rate reflected the deterioration in the terms of trade and the growing external imbalance. The somewhat smaller depreciation of the nominal effective exchange rate reflected Australia’s relatively favorable inflation performance over this period. The exchange rate recovered in 1994/95, appreciating by 1 percent in nominal effective terms, and 1½ percent in real effective terms. However, this masked an appreciation in the first half of the year, followed by a significant depreciation in the second half.

Table 30.

Australia: Period Average Exchange Rates, 1990/91-1995/96

article image
Sources: IMF, International Financial Statistics: and Information Notice System.

Excludes Brazil.

Based on relative consumer prices.

From the preceding period.

CHART 29
CHART 29

AUSTRALIA EXCHANGE RATE AND TERMS OF TRADE, 1984/85-1995/96

(1980=100)

Citation: IMF Staff Country Reports 1996, 037; 10.5089/9781451801934.002.A001

Sources: Australian Bureau of Statistics; and IMF, Information Notice System.1/ Excluding Brazil.2/ Based on relative consumer prices.

VII. Competition Policy in Australia

1. The Hilmer recommendations

The competitiveness of markets for goods and services in Australia has historically been adversely affected by the dominance (including monopoly rights) of large state-owned enterprises, particularly in utilities and rail transportation, and the absent of interstate competition. In recognition of the potential costs of these market rigidities, an independent commission of inquiry, headed by Professor Fred Hilmer, was established in late 1992 to develop a national competition policy. The commission’s report, released the following year, made recommendations to address six major concerns: anticompetitive conduct by firms; unjustified regulatory restrictions on competition; the inappropriate structure of some public monopolies; proprietary access to certain facilities essential for effective competition; monopoly pricing; and competitive advantages enjoyed by certain government businesses as a result of their public sector ownership.

Competitive conduct legislation in Australia is not new. The Commonwealth Trade Practices Act (TPA), enacted in 1974 (and still in force today), prohibited certain anticompetitive agreements and the misuse of market power, as well as exclusive dealing, resale price maintenance, anticompetitive price discrimination, and certain mergers and acquisitions. However, the Act was limited in its scope, exempting the professions, agricultural marketing authorities, and, most importantly, state- and territory-owned businesses.37 The key recommendation of the Hilmer report, therefore, was to extend the application of the existing trade practice legislation to cover these sheltered sectors. The report also recommended a systematic review and, if necessary, reform of Commonwealth, state, and territory regulations that restrict competition, and the establishment of a regime for providing third-party access to essential infrastructure facilities such as rail tracks and electricity transmission grids. In the case where a government decided to introduce competition into a market previously supplied by a public monopoly, the report recommended a prior separation of the regulatory and business functions of the public monopoly and a review of its commercial objectives and business structure. Public monopolies that were corporatized or privatized were urged to operate on competitive principles, while the establishment of a national prices oversight mechanism was proposed to monitor those government businesses that retained their monopoly or near-monopoly status. Where public and private businesses were in competition, it was recommended that competitive neutrality be maintained, i.e., no net competitive advantage should be enjoyed by the government businesses as a result of its public sector ownership—broadly, this would involve subjecting government businesses to the same tax and regulatory regimes applicable to private business.

2. Implementation of national competition policy: Progress to date

Reaching agreement among the Commonwealth and state governments on the implementation of the Hilmer recommendations was made difficult by differences (both actual and perceived) in the costs and benefits of the reforms. While all stood to gain from greater efficiency, some state governments also faced the loss of monopoly rents. The Council of Australian Governments (COAG)38 endorsed the thrust of the Hilmer recommendations at its February 1994 meeting. In April 1995, the COAG signed three intergovernmental agreements to implement the national competition policy package: the Conduct Code Agreement, setting out the basis for extending the competitive conduct rules of the TPA to the unincorporated sector and to state government business activities; the Competition Principles Agreement, covering the other five elements of the Hilmer reforms; and the Agreement to Implement the National Competition Policy and Related Reforms, providing phased compensation payments to the states,39 conditional on their making satisfactory progress on the agreed reforms.

At the Commonwealth level, the Competition Policy Reform Act 1995 amended the TPA40 (from August 1995) and extended its coverage41 (from July 1996); established a new legal access regime for “nationally significant” infrastructure facilities (from November 1995); extended price surveillance powers over state- and territory-owned enterprises (from November 1995); and provided for the establishment of the Australian Competition and Consumer Commission (ACCC) and the National Competition Council (NCC) to oversee the implementation of the Hilmer reforms (from November 1995.)

A summary of the six key elements of the national competition policy package, and the progress to date in their implementation, is contained in Table 31. While the general principles and timetables for reform have been laid out, the detailed plans for implementation have largely been left to the discretion of the individual governments.

Table 31.

Australia: Summary of Six Key Elements of the National Competition Policy Package and Progress to Date in Their Implementation

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3. Implementation of reforms: Specific industries

Although competition policy reform legislation was not passed until 1995, reforms in certain industries—such as telecommunications and aviation—began in the early 1990s and plans for gas and water reforms were drawn up following the February 1994 COAG meeting. The following is a brief description of the competitive reforms planned or undertaken to date in certain key industries.

a. Electricity

A competitive electricity market covering the Australian Capital Territory (ACT), New South Wales, Queensland, South Australia, Tasmania, and Victoria, is expected to commence in September 1996. The market will be characterized by vertical separation of generation, transmission, and distribution activities, with open access to the transmission grid, and horizontal competition between firms in the generation and distribution sectors. The National Electricity Code Administrator will be established to administer an industry code of conduct consistent with the general principles of the national competition policy, and the ACCC will be responsible for regulatory oversight. In preparation for the market, New South Wales, Queensland, and Victoria have already restructured their utilities to separate the generation, transmission, and distribution functions, and New South Wales has developed an access regime for its electricity distribution network. There remains scope for wide differences in ownership structures, however, with some states opting to retain their state-owned generating companies.

b. Gas

In February 1994, the COAG agreed in principle to reform the natural gas industry with a view to stimulating competition in the industry. The reforms, which are to commence in July 1996, are likely to include the dismantling of existing legislative and regulatory barriers to trade in natural gas, and the introduction of a uniform national framework for third-party access to both inter- and intra-jurisdictional supply networks.42 The gas industry is in the process of developing codes of conduct to serve as a basis for third-party access in both transmission and distribution activities. Some states have already proceeded with their own reforms: for example, Victoria’s state-owned Gas and Fuel Corporation of Victoria has begun making tax equivalent payments, and has separated its transmission and distribution businesses; plans have also been outlined to introduce competition (both intra- and interstate) in the production of natural gas.

c. Water

Reforms for the water industry were also endorsed at the February 1994 COAG meeting. Reforms for urban water supply, scheduled to be implemented by end-1998, include the removal of cross-subsidies, and a shift to a “pay-for-use” basis for pricing; reforms for rural water supply, scheduled to be implemented by 2001, focus on changing the pricing regime so as to enable the industry to recoup operating and maintenance costs.

d. Telecommunications

Deregulation of the telecommunications industry began in 1991 with the introduction of a carrier duopoly43 to replace the incumbent monopoly. It was taken further in 1995, when the Commonwealth Government announced that all entry limits to the telecommunications market will be eliminated from July 1997.

e. Transportation

Substantial progress has been made in deregulating domestic and international aviation: the domestic and Tasman aviation markets have been liberalized, international routes have been opened up to Australian carriers other than Qantas (which, itself, was recently privatized), and more expansive bilateral agreements have been concluded. Despite these steps, interstate services remain under a Qantas-Ansett Australia duopoly, following the failure of a third domestic airline and the Government’s decision not to proceed with plans to open (reciprocally) the domestic market to New Zealand-based carriers.

Railways, one of the oldest public monopolies, have also come under reform recently. As of early 1995, all interstate tracks have been switched to standard gauge. The next step involves the establishment, in 1996, of Track Australia, a government corporation which will be responsible for the ownership and management of rail infrastructure, providing a single access system for the interstate track.

Road transportation reform has centered on the development and implementation of nationally consistent charges and regulations for heavy vehicles so as to facilitate interstate movement The National Road Transport Commission established for this purpose in 1991, released its first charging determination for heavy vehicles in June 1992. The Commonwealth implemented national charges from July 1995, and other jurisdictions are expected to do so by July 1996.

Port authority reforms so far have focused on administrative and structural arrangements at publicly-owned ports, with initiatives varying between states and between the port authorities within each state due to differing circumstances. The general trend has been a shedding of noncore services and activities and a movement toward a landlord function. Further reforms are likely to include: the removal of statutory monopolies in the provision of some services offered by port authorities; continued corporatization of port authorities; price oversight; and measures to ensure competitive neutrality in areas where port authorities compete with private operators.

1

See the background paper on Selected Issues for the Article IV consultation.

2

Mr. Paul Cashin, a consultant to the International Monetary Fund, has contributed to this volume.

3

Unless otherwise specified, growth rates for national accounts aggregates refer to annual averages. GDP data refer to GDP(A), the average of the expenditure, income, and production measures.

4

See the accompanying background paper on Selected Issues for the Article IV consultation for details of the output gap calculations.

5

Business investment was, however, boosted over this period by public sector asset sales; excluding these reduces the growth rates of plant and equipment and nonresidential construction investment to 3½ percent and 16½ percent, respectively.

6

The Treasury underlying CPI index excludes mortgage and consumer interest charges and a number of other volatile items. It retains just over 50 percent of the CPI index.

7

See OECD Economic Surveys, Australia 1995, for an example.

8

In contrast, average weekly earnings grew at about 2 percent in 1995. The reason for the disparity between the two measures is that the average weekly earnings measure includes earnings for full-time, part-time, overtime, and casual labor. When the two measures are adjusted and expressed in per hour terms, both exhibit growth rates of about 4½–4¾ percent in 1995.

9

Background information on the history of the Accord may be found in Appendix I of Recent Economic Developments (SM/94/17,1/13/94).

10

The ACTU also agreed to take the Government’s goal of unemployment reduction into consideration in their wage demands.

11

Other key provisions of the Accord VIII agreement included: a compulsory 3 percent employee superannuation contribution, to be phased in at the rate of 1 percent per annum over three years; and a Government commitment to consider doubling the means-tested Maternity Allowance ($A 816 per week for 6 weeks) announced in the budget, to allow 12 weeks of paid maternity leave.

12

Enterprise flexibility clauses allow individual workplaces to reach agreements to adapt award provisions to suit their needs. A facilitative provision is that part of an award clause which enables the enterprise level agreement to determine the manner in which the clause is to apply to the enterprise. Majority clauses—which are relevant in cases of multi-award coverage—provide that the conditions of employment prescribed by the award covering the majority of employees at the enterprise are to apply.

13

See Appendix I of the background paper to the 1994 Article IV consultation (SM/95/33, 2/10/95) for a detailed discussion of the evolution of enterprise bargaining in Australia.

14

Under this system, the first tier distributed a flat amount to all workers, while the second tier specified efficiency offsets as a prerequisite for a 4 percent maximum wage increase.

15

In April 1991, the AIRC rejected calls for enterprise bargaining from the Government, employers, and unions, on the grounds that the parties had “still to develop the maturity necessary” to handle the process. The ACTU defied the decision and began direct talks with employers who, themselves, also eventually formally abandoned their long-standing support of arbitration. Six months later, the AIRC opened the door to enterprise bargaining, setting up for itself the role of monitor.

16

In the case of nonunionized companies, the relevant unions would have the right to be heard by the AIRC but would not have the right of veto over agreements. In the case of partially unionized companies, unions with members and relevant award coverage had to be notified before negotiations began, and be given the opportunity to participate in the negotiations.

17

The PSBR is comprised of the consolidated general government and PTE sectors’ borrowing requirements.

18

Public sector gross debt declined from 70 percent of GDP in the early 1960s to 38 percent of GDP in the early 1980s, with the Commonwealth debt at 22¾ percent of GDP. Expansionary fiscal policy in the first half of the 1980s saw the debt stock rise to 49½ percent of GDP by 1986/87, before it declined in the late 1980s as the fiscal position moved to surplus.

19

This commitment to reduce the deficit over the medium term was first initiated in the 1993/94 budget when a target of 1 percent of GDP deficit by 1996/97 was announced.

20

The 1995/96 budget announced that a further, previously announced, round of tax cuts would be redirected to means-tested government superannuation contributions for employees as part of the superannuation initiative introduced.

21

The wholesale sales tax applies only to a limited number of products, mainly nonfood goods. Services are excluded.

22

As the Government reduced income taxes in lieu of wage rises in the Accord agreements with the unions.

23

Financing arrangements for the states and PTEs were changed in 1987/88. Prior to this, the Commonwealth had borrowed on behalf of the states and PTEs with interest on the debt paid to the Commonwealth by the states and PTEs (and included in nontax revenue). Since 1987/88, the Commonwealth has not borrowed on behalf of the states or PTEs, though outstanding debt was rolled over until 1990/91.

24

This refer to the states and PTEs retiring debt borrowed on their behalf by the Commonwealth.

25

Trends in the state and local government sector and their fiscal consolidation strategies are covered in more detail in the background paper on Selected Issues for the Article IV consultation.

26

Government Trading Enterprises’ Performance Indicators: 1989/90 to 1993/94, Steering Committee on National Performance Monitoring of Government Trading Enterprises, April 1995.

27

A fuller discussion of the monetary policy framework can be found in the background paper on Selected Issues for the Article IV consultation.

28

Fraser, B., “The Art of Monetary Policy,” speech to the Twenty-Third Conference of Economists, September 1994.

29

Stevens, G., “The Rise in Private Debt in the 1980s: Why Did it Happen, and Will it Continue in the 1990s?”, EPAC Background Paper, June 14,1991.

30

M3 is defined to include currency plus all bank deposits of the private nonbank sector. Broad money is M3 plus borrowings from the private sector by nonbank financial institutions, less the latter’s holdings of currency and bank deposits.

31

While the NFR of the state general government sector has been broadly zero over the past two years, the refinancing of maturing debt previously raised by the Commonwealth on behalf of the states has meant that the states have continued to raise funds in net terms from overseas.

32

Until the late 1970s, there were restrictions on capital outflows from Australia and, at times, restrictions on capital inflows. The removal of restrictions on capital inflows began in 1978 with the removal of the embargo on short-term borrowing and the variable deposit requirement In 1980 and 1981, restrictions on portfolio, equity, and real estate investments overseas were relaxed. In 1983, the Australian dollar was floated and the remaining exchange and capital controls were removed.

33

The official sector comprises the Commonwealth and state general government sector and the Reserve Bank.

34

The relaxation of loan council constraints in 1984 and 1985 allowed access to foreign borrowing for state governments and PTEs. However, only with the change in their financing arrangements in 1987/88 (see Chapter IV) did foreign borrowing become an important source of funds to them.

35

See Tease, W., “The Balance of Payments in the 1980s,” in the Australian Macroeconomy in the 1980s, Reserve Bank of Australia, 1990, pp. 158-221. The author highlights a number of factors that have contributed to the growth in the official market, including taxation and regulatory treatment.

36

Robertson, R., “Australian Equity Investment Abroad,” Bulletin, Reserve Bank of Australia, March 1990.

37

Commonwealth-owned businesses, however, were covered by the Act.

38

The COAG consists of representatives from the Commonwealth and each of the state and territory governments. COAG meetings are held each year.

39

The competition payments are estimated to total $A 4,200 million (in 1994/95 prices) over the next decade.

40

Amendments were made to the competitive conduct rules of Part IV of the TPA and to the provisions exempting specific forms of conduct from those rules.

41

Coverage of the competitive conduct rules will be extended to the unincorporated sector and to state government businesses.

42

Private ownership and distribution are not uncommon in the natural gas industry: for example, New South Wales, Northern Territory, Queensland, and Western Australia have privately-owned pipelines, and the distribution of natural gas is undertaken by private firms in the ACT, New South Wales, and Queensland.

43

A triopoly was introduced for mobiles.

Same Series

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Cover IMF Staff Country Reports
Australia: Recent Economic Developments
Author:
International Monetary Fund
Volume/Issue:
Volume 1996: Issue 037
Publisher:
International Monetary Fund
ISBN:
9781451801934
ISSN:
1934-7685
Pages:
98
DOI:
https://doi.org/10.5089/9781451801934.002
  • CHART 1
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    AUSTRALIA REAL OUTPUT, 1984/85-1995/96

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    AUSTRALIA COMPANY PROFITS AND BUSINESS INVESTMENT, 1984/85-1995/96

    (Annual percent change)

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    AUSTRALIA PRICES, 1984/85-1995/96

    (Annual percent change)

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    AUSTRALIA OTHER PRICE DEVELOPMENTS, 1984/85-1995/96

    (Annual percent change)

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    AUSTRALIA EMPLOYMENT AND UNEMPLOYMENT, 1984/85-1995/96

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    AUSTRALIA NONFARM EARNINGS AND COSTS, 1984/85-1995/96

    (Annual percent change)

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    AUSTRALIA PUBLIC SECTOR FINANCING, 1984/85-1995/96 1/

    (In percent of GDP)

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    AUSTRALIA COMMONWEALTH BUDGET BALANCE, 1984/85-1995/96 1/

    (In percent of GDP)

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    AUSTRALIA COMMONWEALTH REVENUES, 1984/85-1995/96 1/

    (In percent of GDP)

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    AUSTRALIA COMMONWEALTH EXPENDITURES, 1984/85-1995/96 1/

    (In percent of GDP)

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    AUSTRALIA STATE AND LOCAL GENERAL GOVERNMENT FINANCES, 1984/85-1994/95

    (In percent of GDP)

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    AUSTRALIA GOVERNMENT BUSINESS ENTERPRISES’ OPERATIONS, 1984/85-1994/95

    (In percent of GDP)

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    AUSTRALIA INTEREST RATES, 1984/85-1995/96

    (In percent)

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    AUSTRALIA INTEREST RATE SPREADS, 1984/85-1995/96

    (In percent)

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    AUSTRALIA CORPORATE AND HOUSEHOLD SECTOR DEBT, 1980/81-1994/95

    (In percent of GDP)

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    AUSTRALIA MONEY AND CREDIT AGGREGATES, 1984/85-1995/96

    (Annual percent change)

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    AUSTRALIA EXTERNAL CURRENT ACCOUNT, 1984/85-1995/96

    (In percent of GDP)

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    AUSTRALIA IMPORT VOLUME DEVELOPMENTS, 1984/85-1995/96

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    AUSTRALIA EXPORT VOLUME DEVELOPMENTS, 1984/85-1994/95

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    AUSTRALIA INVESTMENT INCOME, 1984/85-1994/95

    (In percent of GDP)

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    AUSTRALIA CAPITAL FLOWS, 1961/62-1994/95

    (In percent of GDP)

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    AUSTRALIA OFFICIAL AND NONOFFICIAL NET CAPITAL FLOWS, 1961/62-1994/95

    (In percent of GDP)

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    AUSTRALIA NONOFFICIAL CAPITAL INFLOWS, 1961/62-1994/95

    (In percent of GDP)

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    AUSTRALIA NONOFFICIAL CAPITAL OUTFLOWS, 1961/62-1994/95

    (In percent of GDP)

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    AUSTRALIA EXTERNAL BALANCE, 1986/87-1995/96

    (In billions of Australian dollars)

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    AUSTRALIA EXTERNAL LIABILITIES, 1980/81-1994/95

    (In percent of GDP)

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    AUSTRALIA GROSS EXTERNAL DEBT BY SECTOR, 1980/81-1995/96

    (In percent of GDP)

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    AUSTRALIA COMPOSITION AND MATURITY OF EXTERNAL DEBT

    (In percent of total debt outstanding)

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    AUSTRALIA EXCHANGE RATE AND TERMS OF TRADE, 1984/85-1995/96

    (1980=100)

CHART 1

AUSTRALIA REAL OUTPUT, 1984/85-1995/96
CHART 2

AUSTRALIA COMPANY PROFITS AND BUSINESS INVESTMENT, 1984/85-1995/96

(Annual percent change)
CHART 3

AUSTRALIA PRICES, 1984/85-1995/96

(Annual percent change)
CHART 4

AUSTRALIA OTHER PRICE DEVELOPMENTS, 1984/85-1995/96

(Annual percent change)
CHART 5

AUSTRALIA EMPLOYMENT AND UNEMPLOYMENT, 1984/85-1995/96
CHART 6

AUSTRALIA NONFARM EARNINGS AND COSTS, 1984/85-1995/96

(Annual percent change)
CHART 7

AUSTRALIA PUBLIC SECTOR FINANCING, 1984/85-1995/96 1/

(In percent of GDP)
CHART 8

AUSTRALIA COMMONWEALTH BUDGET BALANCE, 1984/85-1995/96 1/

(In percent of GDP)
CHART 9

AUSTRALIA COMMONWEALTH REVENUES, 1984/85-1995/96 1/

(In percent of GDP)
CHART 10

AUSTRALIA COMMONWEALTH EXPENDITURES, 1984/85-1995/96 1/

(In percent of GDP)
CHART 11

AUSTRALIA STATE AND LOCAL GENERAL GOVERNMENT FINANCES, 1984/85-1994/95

(In percent of GDP)
CHART 12

AUSTRALIA GOVERNMENT BUSINESS ENTERPRISES’ OPERATIONS, 1984/85-1994/95

(In percent of GDP)
CHART 13

AUSTRALIA INTEREST RATES, 1984/85-1995/96

(In percent)
CHART 14

AUSTRALIA INTEREST RATE SPREADS, 1984/85-1995/96

(In percent)
CHART 15

AUSTRALIA CORPORATE AND HOUSEHOLD SECTOR DEBT, 1980/81-1994/95

(In percent of GDP)
CHART 16

AUSTRALIA MONEY AND CREDIT AGGREGATES, 1984/85-1995/96

(Annual percent change)
CHART 17

AUSTRALIA EXTERNAL CURRENT ACCOUNT, 1984/85-1995/96

(In percent of GDP)
CHART 18

AUSTRALIA IMPORT VOLUME DEVELOPMENTS, 1984/85-1995/96
CHART 19

AUSTRALIA EXPORT VOLUME DEVELOPMENTS, 1984/85-1994/95
CHART 20

AUSTRALIA INVESTMENT INCOME, 1984/85-1994/95

(In percent of GDP)
CHART 21

AUSTRALIA CAPITAL FLOWS, 1961/62-1994/95

(In percent of GDP)
CHART 22

AUSTRALIA OFFICIAL AND NONOFFICIAL NET CAPITAL FLOWS, 1961/62-1994/95

(In percent of GDP)
CHART 23

AUSTRALIA NONOFFICIAL CAPITAL INFLOWS, 1961/62-1994/95

(In percent of GDP)
CHART 24

AUSTRALIA NONOFFICIAL CAPITAL OUTFLOWS, 1961/62-1994/95

(In percent of GDP)
CHART 25

AUSTRALIA EXTERNAL BALANCE, 1986/87-1995/96

(In billions of Australian dollars)
CHART 26

AUSTRALIA EXTERNAL LIABILITIES, 1980/81-1994/95

(In percent of GDP)
CHART 27

AUSTRALIA GROSS EXTERNAL DEBT BY SECTOR, 1980/81-1995/96

(In percent of GDP)
CHART 28

AUSTRALIA COMPOSITION AND MATURITY OF EXTERNAL DEBT

(In percent of total debt outstanding)
CHART 29

AUSTRALIA EXCHANGE RATE AND TERMS OF TRADE, 1984/85-1995/96

(1980=100)