Australia
Recent Economic Developments

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.