Australia
Recent Economic Developments
Author:
International Monetary Fund
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Publication Date:
17 Apr 1997
eISBN:
9781451801941
Language:
English
Keywords:
ISCR; CR; exchange rate; state government; fiscal policy; unemployment rate; private sector; retained earnings; capital expenditure; interest rate; trade balance
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This paper reviews developments in the Australian economy during the prolonged expansion of the 1990s. The focus is on developments in the real sector, public finances, monetary policy, and the balance of payments during 1996–97. The paper reviews longer-term developments in the labor market in Australia, examining the causes of the trend rise in unemployment. In particular, it examines the role played by the traditional, centralized industrial relations system and discusses the efforts to encourage enterprise bargaining and establish a more flexible labor market.

Abstract

This paper reviews developments in the Australian economy during the prolonged expansion of the 1990s. The focus is on developments in the real sector, public finances, monetary policy, and the balance of payments during 1996–97. The paper reviews longer-term developments in the labor market in Australia, examining the causes of the trend rise in unemployment. In particular, it examines the role played by the traditional, centralized industrial relations system and discusses the efforts to encourage enterprise bargaining and establish a more flexible labor market.

Australia: Basic Data 1/

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Sources: Data provided by the Australian authorities; IMF, International Financial Statistics: and staff projections.

Fiscal year ends June 30.

Average of income, expenditure, and production measures of GDP.

Based on 1996/97 Commonwealth Budget Projections.

Adjusted to exclude net advances.

October 1996, percent change on a year earlier.

December 1996.

November 1996.

Foreign borrowing by Australian residents less the sum of reserve assets and Australian lending abroad.

IMF, Information Notice System index, excluding Brazil.

October 1996.

I. Introduction

1. This paper reviews developments in the Australian economy during the prolonged expansion of the 1990s. The focus of this paper is on developments in the real sector, public finances, monetary policy, and the balance of payments, especially since the last report on Recent Economic Developments was issued in March 1996. An accompanying set of papers1 addresses some of the current policy issues in a longer-run perspective.

2. The Australian economy has now completed five years of solid growth since the recession of 1990/91, which saw output decline and unemployment eventually peak at 11 percent. Chapter II analyses the real sector developments during the various stages of the recovery. Initially, growth was weak and based almost solely on consumption spending, notably by the public sector. Later, activity accelerated and signs of overheating began to emerge: unemployment fell rapidly, the current account deficit deteriorated sharply, and underlying inflation moved above 3 percent. The authorities responded by tightening financial policies and, by 1995/96, the recovery was once again on a sustainable path.

3. At the same time, the reduction in unemployment stalled, with the rate remaining around 8½ percent through end-1996. This trend is symptomatic of the challenges faced by Australia in achieving a significant reduction in unemployment. Chapter III reviews labor market developments during the recovery, including the trend toward more part-time workers and greater female labor force participation. Also reviewed are the government’s initiatives aimed at promoting a more flexible and efficient labor market and recent reforms to active labor market policies.

4. Chapter IV discusses public finances, reviewing developments at the Commonwealth and state levels. Although the recovery has allowed a cyclical reduction in the public sector deficit from the high levels reached during the recession, the underlying structural Commonwealth deficit has shown less improvement, and public saving remains a low 2½ percent of GDP. Consequently, the government introduced in the 1996/97 Commonwealth budget a new medium-term deficit-reduction plan and a fiscal framework that seeks to achieve underlying budget balance “over the cycle.” The fiscal consolidation is expected to reduce the Commonwealth’s underlying budget deficit from 2 percent of GDP in 1995/96 to 1 percent of GDP in 1996/97; however, slippages have recently emerged. To improve the transparency and accountability of fiscal policy, the government plans to introduce a Charter of Budget Honesty.

5. Monetary policy is also being guided by a new institutional framework, an inflation-targeting approach, introduced in 1993, which aims to achieve underlying inflation of 2–3 percent, on average, over the cycle. From mid-1996, as the inflation outlook improved and the exchange rate strengthened, the Reserve Bank saw room to reduce the official short-term interest rate target by 150 basis points to 6 percent. These developments are discussed in Chapter V, with a brief discussion of the recent steps taken to further improve monetary policy accountability and transparency. Also discussed is the Wallis Inquiry into the financial system, established by the government to review the regulatory framework and recommend reforms.

6. Another notable aspect of the recovery is the persistence of sizable external current account deficits. Although these have been financed easily, they have also resulted in a significant buildup in external liabilities, put a floor on domestic interest rates, and increased the vulnerability of the economy to external shocks. Hence, a main focus of the government’s fiscal strategy—and of the overall strategy to raise national saving—is to address the structural imbalance in the external position, and to reduce the level of external debt. External sector developments are reviewed in Chapter VI.

7. The Australian economy is still undergoing substantial structural change. Chapter VII gives the details of the authorities’ policy in this area. The centerpiece of the current efforts is the National Competition Policy, which aims to extend competition to previously sheltered sectors of the economy, especially the public enterprises. This policy was adopted in 1995, and considerable progress has already been made in bringing greater competition to the electricity and gas sectors. Reviews are also being undertaken of the foreign investment policy and future assistance to the motor vehicle, and clothing, textiles, and footwear sectors.

8. In addition, three background papers have been prepared in an accompanying volume that addresses selected key issues in greater analytical detail.

9. The first paper concerns the issue of saving, the indispensable central element in any scenario for raising potential output. The paper focuses on the impact of the structure and generosity of the tax and social security and welfare system, which has long been viewed as a factor behind the unusually sharp decline in household saving in Australia. The paper presents an empirical analysis of the determinants of household saving in 21 OECD countries and draws some implications for Australia.

10. The next paper reviews longer-term developments in the labor market in Australia, examining the causes of the trend rise in unemployment. In particular, it examines the role played by the traditional, centralized industrial relations system and discusses the efforts to encourage enterprise bargaining and establish a more flexible labor market.

11. The third paper assesses Australia’s approach to institutional reform in the key areas of monetary and fiscal policy. The paper discusses the important steps being taken to build the credibility of monetary and fiscal policy by emphasizing transparency and accountability. Australia’s reforms are also contrasted with the approach taken in other countries, particularly New Zealand.

II. Real Sector

A. Overview

12. The current economic expansion, which began in 1991/92 after a short and shallow recession, differs from its predecessors in a number of important ways. Compared with the expansion after the recession of 1982/83, output and employment growth has been somewhat less vigorous during the present recovery. Over the last five years, real output has risen 20 percent,2 slightly less than the 25 percent registered at the same stage of the previous expansion, while employment has increased by only 8 percent, compared to 17 percent previously (Chart 1).

CHART 1
CHART 1

AUSTRALIA: RECOVERIES, 1983/84–1996/97 1/

(Trough=100)

Citation: IMF Staff Country Reports 1997, 022; 10.5089/9781451801941.002.A001

Source: Australian Bureau of Statistics.1/ The troughs are as follows: 1983Q1 for the 1983/84 recovery; 1991Q2 for the 1991/92 recovery.

13. Nevertheless, this expansion represents in many ways a stronger performance than earlier recoveries. To begin with, the expansion has been unusually prolonged. Since the cyclical trough in 1991, the Australian economy has expanded for 21 consecutive quarters—the longest period of uninterrupted quarterly growth since the late 1950s. Moreover, the expansion has been soundly based, on well-balanced increases in aggregate demand and wide-ranging increases in production. Growth has also been evenly paced, avoiding the “boom-and-bust” cycles of the past. Although some demand pressures emerged in 1994/95, a forward-looking tightening of financial policies soon put the expansion back on a sustainable path. Finally, the improvement in labor productivity has been relatively large in the present recovery, and total factor productivity appears to have significantly improved compared with the 1980s.3

14. On the demand side, growth has been well balanced, with each area’s contribution to growth being close to its share in overall GDP (Table 1). Private consumption has been the predominant driving force, accounting for two-thirds of total growth over the five-year period. Investment, too, has made an important—and growing—contribution, accounting for one-fifth of growth during the expansion as a whole, and one-third from the third year onward. Meanwhile, public consumption played only a limited role (except in the initial stages), while the contribution from net exports has fluctuated greatly and was slightly negative on average (with exports accounting for about one-half of growth, and imports subtracting about the same amount).

Table 1.

Australia: Selected National Accounts Aggregates at 1989/90 Prices, 1991/92-1996/97

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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.

15. Growth has also been well balanced on the supply side (Table 2). On average, real output growth has been strongest in communication services (11 percent on average from 1991/92 to 1995/96) following the deregulation of the sector, which allowed a second communication company to establish a network in Australia and which will open the market to all potential entrants in 1997. The manufacturing sector has also performed relatively well, with its gross output growing by an average 3 percent per annum, and its exports increasing from 18 percent to 27 percent of total foreign shipments over the past five years.

Table 2.

Australia: Sectoral Components of Gross Domestic Product at 1989/90 Prices, 1991/92-1996/97

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Source: Australian Bureau of Statistics, National Accounts.

Seasonally adjusted.

Production-based measure.

Income-based measure.

16. Moreover, sectoral growth has proceeded in a sequential fashion, with slowdowns in some areas being accompanied by accelerations in others, thereby keeping the expansion on an even keel. The agricultural sector was caught in a severe drought in 1994/95, causing output to fall by 20 percent in real terms, but it fully recovered in 1995/96. Mining was weak at the outset of the expansion, but picked up steadily and grew by a solid 4¾ percent in the past two years, reflecting a gradual strengthening of export demand. Most recently, manufacturing has weakened, but services growth has picked up.

B. Evolution of the Expansion

17. The five years of expansion can be roughly divided into three phases. The expansion began with two years of relatively weak growth, with real GDP expanding at about 2 percent on average. This was followed by two years of strong growth of about 4¼ percent on average, during which signs of overheating appeared. Then, over the past year, demand pressures eased, and growth slowed to a more sustainable 3¾ percent in the year ending September 1996.

18. In the first phase of the expansion, from 1991/92 to 1992/93, consumption was the main—almost the sole—engine of growth. Private consumption accounted for the bulk of the early expansion, increasing at 3 percent on average over the first two years and driven by renewed growth in disposable income, as well as a decline in the household saving ratio. Active counter-cyclical fiscal policy also played an important role, as public consumption increased by 3 percent during the first year. Meanwhile, aggregate private investment continued to contract in 1991/92 (by about 6 percent in real terms), as the recession had created a substantial margin in capacity and weakened firms’ balance sheets. Employment also continued to fall, causing the unemployment rate to rise to 11 percent in 1992/93.

19. In the second phase of the expansion, from 1993/94 to 1994/95, private investment began to boom, triggering a surge in aggregate demand (Chart 2). Solid growth in household incomes, low mortgage rates, and favorable levels of household indebtedness spurred housing investment to double-digit growth rates. Business investment also picked up, as a result of rising company profits and strong business confidence, with equipment investment reaching a peak of 21½ percent real growth in 1994/95. At the same time, consumption growth remained strong. Private consumption growth accelerated to 4¾ percent, financed partly by further declines in the household saving ratio, which reached a historic low of 2¼ percent in 1994/95. Government consumption growth also remained rapid, despite the entrenchment of the recovery, as additional spending on areas such as health and labor market programs offset declines in unemployment benefits.

CHART 2
CHART 2

AUSTRALIA: REAL OUTPUT, 1986/87–1996/97

Citation: IMF Staff Country Reports 1997, 022; 10.5089/9781451801941.002.A001

Source: Australian Bureau of Statistics.

20. By 1994/95, the rapid expansion of aggregate demand had begun to generate overheating pressures. GDP growth increased to more than 4 percent for the second consecutive year, thereby creating a positive output gap (according to staff estimates),4 while employment grew by 4 percent, bringing the unemployment rate down to 8½ percent at the end of the year. However, this increase in supply was far outstripped by a 6¼ percent increase in gross national expenditure. As a result, imports surged, led by a rapid growth of capital equipment, which swelled the current account deficit to 6¼ percent of GDP, from 4 percent of GDP the year before. Early in the next financial year, underlying inflation breached the upper end of the authorities’ 2–3 percent target band. As signs of these pressures emerged in 1994, the authorities tightened financial policies, both by raising interest rates substantially and by consolidating fiscal policy.

21. In the third phase of the expansion, starting in 1995/96, this tightening began to take clear hold.5 Construction activity contracted sharply, while business fixed investment slowed, reducing aggregate real private investment growth to 1½ percent in 1995/96, compared with 10½ percent in the year before. Public consumption growth also declined, to 2½ percent, while a decline in import growth—paralleled by a good export performance—narrowed the current account deficit back to 4¼ percent of GDP. Meanwhile, underlying inflation returned to well within the target band.

C. Developments During 1995/96–1996/97

22. Over the past year, growth decelerated to a more sustainable pace but, at the same time, some sectoral weaknesses began to emerge. Real growth decelerated to 3¾ percent in the year ending September 1996 (the first quarter of 1996/97), bringing actual growth closer to potential, which has been estimated by the staff at 3¼ to 3½ percent.6 The base of the expansion narrowed somewhat, as private consumption and net exports both slowed, overall demand from the public sector fell, and manufacturing output decelerated. However, investment activity once again increased.

23. The slowdown of private consumption growth, from 5 percent in the year ending March 1996 to 3¼ percent in the year ending September 1996, reflected two main factors. Household income growth declined, as annual growth in average wage earnings7 eased from 5 percent in December 1995 to 3¾ percent in September 1996, while employment growth dropped significantly. In addition, the sharp downward trend in the household saving ratio bottomed out, and household saving rebounded to 3 percent of disposable income in the September 1996 quarter, up from 2¼ percent in the March 1996 quarter (Table 3).8

Table 3.

Australia: Household Income, Expenditure, and Savings, 1991/92-1996/97

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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.

24. Slowdowns were also apparent in several other areas. Net exports slowed, owing both to a deceleration of exports from mid-1996 and an acceleration of imports. This can, in part, be attributed to the appreciation of the exchange rate, in a context where the opening of the economy has led to a significant increase in international competition. As a result, corporate profits fell markedly, especially in manufacturing (Chart 3). At the same time, public sector demand declined, owing to the ongoing efforts of fiscal consolidation at all levels of government. Investment demand at the level of public enterprises fell sharply, although part of this was merely the result of a shift in the national accounts to the private sector, induced by privatization.

CHART 3
CHART 3

AUSTRALIA: COMPANY PROFITS AND BUSINESS INVESTMENT, 1986/87–1996/97

(Annual percent change)

Citation: IMF Staff Country Reports 1997, 022; 10.5089/9781451801941.002.A001

Source: Australian Bureau of Statistics.

25. On the positive side, however, business investment remained strong, buoyed by the large declines in interest rates over the past year. In the year ending September 1996, business investment increased by 19 percent in real terms, contributing 2 percentage points to GDP growth—just as much as private consumption. Nondwelling construction grew rapidly, reflecting extensive investment in the communication sector, privately provided infrastructure investment, and construction associated with the Olympic Games in Sydney in 2000. Equipment investment accelerated during the year to 22 percent real growth in September 1996, although much of this was apparently capital-deepening rather than capital-widening investment, with the aim of saving on labor inputs, whose costs had risen significantly in the expansion. The fact that employment growth halved to 2½ percent in 1995/96, from 4 percent the year before, may be an indication of a laborsaving trend.

26. On residential construction, which had fallen by 13 percent in 1995/96, signs emerged (increasing number of mortgage and loan applications) that pointed to a revival of activity, partly due to the decline in interest rates, but also because the excess supply that had been created earlier in the expansion had been eliminated.

27. On the production side, two sectoral developments in 1995/96 stand out: the strong recovery of the agricultural sector, which expanded by 21 percent in real terms (recovering fully from the drought a year earlier), and the continued strong growth of the communication services sector, which expanded by 13 percent. Output growth in the remaining sectors was spread relatively evenly in 1995/96, including the mining sector, which demonstrated a solid expansion of 4¾ percent.

D. Prices

28. Another striking aspect of the current recovery is that inflation has remained at low levels throughout, never exceeding 3¼ percent in underlying terms, compared with a peak of 10 percent during the expansion of the mid-1980s (Table 5). Some cyclical pressures on costs and prices did emerge in 1994/95, as margins of slack in the economy narrowed, world commodity prices increased, and the exchange rate weakened. As a result, underlying inflation9 accelerated in mid-1995, reaching 3¼ percent by December 1995. Headline consumer price (CPI) inflation picked up more sharply, reaching a little over 5 percent in the year to December 1995 (Chart 4), mainly reflecting the impact of the tightening of monetary policy10 in the second half of 1994 on mortgage and other interest rates. Both the underlying and headline rates were boosted by the impact of the indirect tax increases in late 1995, which added about ½ percent to inflation.

Table 4.

Australia: Saving and Investment Balances, 1991/92-1995/96

(In percent of GDP)

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Source: Australian Bureau of Statistics, National Accounts.
Table 5.

Australia: Selected Price Indices, 1991/92-1996/97

(Percent change from previous year)

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

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 4
CHART 4

AUSTRALIA: PRICES, 1986/87–1996/97

(Annual percent change)

Citation: IMF Staff Country Reports 1997, 022; 10.5089/9781451801941.002.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.

29. In early 1996, however, both underlying and headline inflation decelerated, owing to an appreciation of the exchange rate and the impact of the Reserve Bank’s tightening of monetary policy in late 1994. The appreciation of the exchange rate by about 10 percent in trade weighted terms over the year to September 1996 led to a fall in import prices by 8 percent over the same period. As a result of these developments, underlying inflation fell to 2½ percent in the year to September 1996, while headline inflation fell to 2 percent.

III. Labor Market

A. Overview

30. A further significant aspect of the present expansion has been the persistence of historically high levels of unemployment. Five years after the recession, at end-1995/96, the unemployment rate was still at 8½ percent, only 2½ percentage points lower than its peak of 11 percent in 1992/93. In comparison, during the recovery after the 1982/83 recession, unemployment peaked at only 9½ percent, and five years later it had fallen to 6½percent.

31. Although the decline in unemployment from its peak has been similar to previous experience, the pace of both employment and labor force growth has been much slower. Employment has been dampened by a number of factors: the average output growth of 3¼ percent per annum was somewhat lower than the 4½ percent in the previous expansion; real wages have risen significantly during the present expansion, while they fell during the expansion of the 1980s; employment growth in the public sector has been significantly lower than in the 1980s; and, finally, continuing structural changes in the economy (such as an increase in the services sector) and capital-deepening in the manufacturing sector may have contributed to the low rate of full-time employment growth.

B. Employment

32. According to recent estimates, the structural rate of unemployment (the NAIRU) has increased over the past decade; for 1995/96, a number of sources have estimated it at about 7½ to 8½ percent, compared with 6 to 7 percent in the late 1980s.11 The long-term unemployment rate has shifted upward in the present cycle as well: whereas it stayed below 3 percent throughout the recession and recovery of the 1980s, during the current expansion it peaked at 4 percent in 1992/93, and its level of 2½ percent in 1995/96 was still significantly above its trough of 1½ percent in the late 1980s. The unemployment rate has also varied according to the different stages of the current expansion. During the first stage, when economic growth was slow, unemployment actually rose, from 8½ percent during the recession of 1990/91 to a peak of 11 percent in 1992/93 (Table 6). In the two subsequent years, when the output expansion gained momentum, the rate fell significantly, to 8½ percent by end-1994/95. Then, in 1995/96, when the expansion entered its third slower phase, the rate began to stabilize, standing at 8¾ percent in the quarter ending September 1996 (Chart 5).

Table 6.

Australia: Labor Market, 1991/92-1996/97 1/

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Source: Australian Bureau of Statistics, Labor Force, Australia.

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, 1986/87–1996/97

Citation: IMF Staff Country Reports 1997, 022; 10.5089/9781451801941.002.A001

Source: Australian Bureau of Statistics.1/ Over one year.

33. The upward shift in unemployment in the present recovery has not been due to a more rapid labor force growth, but rather to subdued employment growth. Over the entire five years of expansion, employment growth averaged at 1¼ percent per annum, compared with 2¾ percent per annum in the five years after the 1982/83 recession. During the first two years of the present recovery, employment actually fell, by a cumulative 2 percent, despite a gradual pickup in GDP growth to 3¼ percent. Only from end-1993 onward, when the expansion gained momentum, did it begin to grow, reaching a peak of 4 percent growth in 1994/95, and then declining to 2½ percent in 1995/96.12

34. There are a number of reasons for the relatively subdued rate of employment growth in the present recovery. Output growth has been somewhat weaker in the present expansion than in previous expansions, and government employment has hardly grown (1 percent per annum on average). Furthermore, real wages have risen relatively rapidly: in 1995/96, average ordinary full-time earnings were 7 percent higher in real terms than in 1990/91; whereas in 1987/88, they were 2 percent lower than in the recession five years earlier,13 reflecting a government-union incomes policy (the “Accord”).14 Furthermore, particularly in the later stage of the present expansion, inflation fell short of inflation expectations, leading to higher-than-expected real wage outcomes (see Section C below).

35. In addition, a shift in the composition of employment toward a higher share of part-time employment has also taken place over the present cycle. On average, in the five years of the present expansion, part-time employment grew by 4 percent per annum, compared with full-time employment growth of less than 1 percent per annum. This led to an increase in the share of employed persons occupying part-time jobs to 25 percent at end-1995/96, compared with 23 percent five years earlier. Underlying this shift to more part-time employment may have been the fact that, recently, sectors that have expanded which either use little labor input (mining) or use part-time labor heavily (services). By contrast, activity in sectors which mainly use full-time employees, such as dwelling construction, manufacturing, and the public sector, remained subdued. Also, the deregulation of the economy (including changes in labor regulations) and labor-saving changes within organizations may have played a role in strengthening part-time job creation, at the expense of full-time jobs. The banking sector, for example, reduced full-time staff significantly, and increasingly began to operate branches with a minimum of full-time staff, complemented by part-time employees during peak hours.

36. Possibly linked to the relatively strong growth of part-time employment was an increase in the share of female employment in total employment, which rose from 42 percent to 43 percent from 1991/92 to 1995/96. Indicative of the trends outlined above, the share of part-time employment within female employment rose from 37¾ percent to 43¼ percent over the same period.

37. Labor force growth was minimal in the first two years of the expansion (about ½ percent on average), but accelerated to 2 percent on average in the following three years. Participation rates were flat in the first two years, but have gradually increased since then, from 62½ percent in 1992/93 to 63¾ percent in 1995/96. The entire increase traces back to a higher female participation rate, which stood at 54 percent in 1995/96, 2 percentage points higher than at the beginning of the cycle. The male participation rate remained practically unchanged at 74 percent throughout.

C. Recent Wage Developments

38. The employment growth during the recent stage of the cycle has been accompanied by an acceleration of wage growth. Growth in AWOTE increased from 2 percent in 1992/93 to 4 percent in 1994/95 and to 4½ percent in 1995/96 (Table 7). Wage increases in enterprise bargaining agreements increased to around 5 percent, although those through the award system remained subdued below 2 percent. These wage developments implied that, in the nonfarm business sector, despite a strong productivity increase of 3¾ percent, unit labor costs rose by 3¾ percent, the strongest rise in unit labor costs in the present cycle (Table 8 and Chart 6).

Table 7.

Australia: Changes in Employees’ Average Awards and Weekly Earnings, 1991/92-1996/97

(Percent change from previous year)

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Sources: Australian Bureau of Statistics, National Accounts and Averace 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.

Table 8.

Australia: Developments in Unit Labor Costs in the Nonfarm Sector, 1991/92-1996/97

(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.

CHART 6
CHART 6

AUSTRALIA: EARNINGS AND COSTS, 1986/87–1996/97

(Annual percent change)

Citation: IMF Staff Country Reports 1997, 022; 10.5089/9781451801941.002.A001

Source: Australian Bureau of Statistics.

39. Over the past year, growth in AWOTE has, however, moderated, from 5 percent in the quarter ending September 1995 to 3¾ percent in the quarter ending September 1996. Nevertheless, since inflation has fallen more sharply than nominal wages, real wages have actually increased, from a level of about zero in September 1995 to about 1¾ percent in September 1996. Part of this increase in real wages reflects actual inflation outcomes that have continuously fallen short of inflation expectations, as measured by consumer and business surveys. In the manufacturing sector, where international competition and (more recently) exchange rate appreciation, have contained growth in output prices, real wage outcomes deflated by producer prices have risen even more strongly and contributed to low labor demand.15

D. Industrial Relations and Labor Market Policies16

40. Traditionally, Australia’s industrial relations system had been marked by the centralized fixing of wage and employment conditions through the “award system.” While this had the benefit of giving the authorities some control over aggregate wages, the relative lack of flexibility in labor relations meant that when the structural reforms of the 1980s began to transform the economy, the shifts in demand were borne disproportionately through job losses and higher unemployment, rather than changes in wages and working conditions. The Industrial Relations Reform Act (IRRA), 1993, aimed to remedy this situation by promoting a shift toward greater emphasis on bargaining at the enterprise level. As a result, wage increases for about one-third of the workforce are now determined through formal enterprise bargains, one-third through the award system, and one-third through unregistered informal agreements.

41. In late 1996, further impetus to this trend was provided by the Workplace Reform Act. This Act aims to reduce the restrictions that the award system places on enterprise bargaining. Although enterprise bargains are still required to have “no disadvantage” for employees compared to the relevant award, the Act effectively eases this constraint. One way this will be done is by reducing the coverage of the award system to a set of 20 core employment conditions, thereby opening up all the remaining areas for direct negotiation. The role of third parties—the unions and the Australian Industrial Relations Commission—in the bargaining process has also been reduced. New Australian Workplace Agreements (AWAs) have been introduced to enable nonunion workplaces to negotiate agreements without union involvement.17

42. These changes should allow wage and employment conditions to be more effectively tailored to the needs of the individual enterprise, and should help boost productivity. The Act also aims to promote more competition in the labor market by removing the monopoly status of trade unions and providing equal treatment for all bargaining parties. This will enable enterprise unions to be established. The unfair dismissal provisions, which had been strengthened in the IRRA, were found to be too complex and legalistic and to have acted as a disincentive to hiring. Consequently, these provisions have been eased, and will be interpreted in a way that is viewed as fair to both employers and employees. The scope for secondary boycott has also been significantly narrowed.

43. The 1994 Working Nation statement expanded the role of active labor market programs, guaranteeing a job placement to all those who had been unemployed for over 18 months. However, an official evaluation indicated that these programs had not met their objectives, especially in that they had relatively limited success in assisting the long-term unemployed into ongoing employment. Consequently, the new government announced significant reforms to the provision of labor market assistance in the 1996/97 budget. The aim of the reforms is to improve the efficiency with which assistance is provided by introducing more competition into the market for service provision, and by more effectively tailoring the type of assistance provided to the individual needs of the client. Two main types of service providers will be established—a public sector Service Delivery Agency (SDA) and Employment Placement Enterprises (EPEs). The SDA will be the initial single point of contact for those seeking to obtain employment and income support services, and will provide self-help job search facilities. Unemployed persons will be assessed by the SDA to determine their eligibility for more intensive employment assistance. If eligible, they will be referred to an EPE who will provide job search assistance and training. The employment placement market will eventually be competitive, and the EPE service fee will partly be determined by the enterprise’s success in placing the individual into durable employment.

IV. Public Finances

A. Overview

44. The public sector in Australia consists of the Commonwealth, state and territory, and local government sectors, with each being divided into the general government sector and the public trading enterprise (PTE) sector.18 There are significant differences in the roles and responsibilities of the various levels of government. The major outlay responsibilities of the Commonwealth are defense, social security, and welfare; the Commonwealth also has a major role in funding education and health services provided by the states and the private sector. The major state government functions are the delivery of education, health, and public order services. A large vertical fiscal imbalance exists between the Commonwealth and state governments, with the Commonwealth raising around 75 percent of total general government revenue, but accounting for only about 55 percent of outlays (excluding transfers to other levels of government). This imbalance is addressed by Commonwealth transfers to the state governments, which account for about 40 percent of the latter’s revenue. The PTE sector is an important provider of economic infrastructure, with the state governments owning most utilities.

45. The underlying deficit of the public sector declined from 4¾ percent of GDP in 1992/93 to 1½ percent of GDP in 1995/96 (Table 9 and Chart 7).19,20 This improvement was initially due to the state general government sector, whose underlying budget position moved from a deficit of ¾ percent of GDP in 1991/92 to broad balance in 1993/94–1994/95 and to a surplus of ¾ percent of GDP in 1995/96, and to PTEs (although the improvement in the latter was reversed in 1995/96). At the Commonwealth level, the budgetary position continued to deteriorate in 1992/93 as fiscal policy was used to spur the economic recovery. The underlying deficit began to improve in 1993/94, initially due to cyclical factors, and although it has since been halved, in 1995/96 it remained at just over 2 percent of GDP. Staff estimates suggest that the cyclical component of the deficit has been eliminated, so that this deficit is structural in nature (Table 10).

Table 9.

Australia: Underlying Public Sector Balance, 1991/92-1996/97 1/

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Sources: Commonwealth of Australia, 1996/97 Budget statement; and Australian Bureau of Statistics, Government Financial Estimates Australia. 1996/97.

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

From the Commonwealth budget papers. All other figures are from Australian Bureau of Statistics, Government Financial Estimates, 1996/97. The definition of budget balance differs between the Commonwealth budget and ABS presentations. This is largely on account of the treatment of receipts and payments by the budget sector of PTE superannuation and compensation provisions and financial lease arrangements.

The Commonwealth general government sector comprises the budget and non-budget sectors. The non-budget sector is comprised of government authorities which operate outside of the Commonwealth Public Account through their own bank accounts.

Nonfinancial government business enterprises.

Estimates based on 1996/97 Commonwealth and State Government budgets.

CHART 7
CHART 7

AUSTRALIA: PUBLIC SECTOR FINANCES, 1991/92–1996/97

(In percent of GDP)

Citation: IMF Staff Country Reports 1997, 022; 10.5089/9781451801941.002.A001

Source: Australian Bureau of Statistics; Commonwealth of Australia, various budget statements.1/ From Australia Bureau of Statistics, Government Financial Estimates Australia, 1996/97. 1996/97 data are projections, based on Commonwealth and state budgets.2/ Nonfinancial government business enterprises.3/ From Commonwealth of Australia, 1996/97 Budget papers. 1996/97 data ore estimates. Refer to footnotes in Table 9 for differences in presentation between ABS and Commonwealth Government statistics.
Table 10:

Structural Budget Calculations, Commonwealth and Consolidated General Government, 1986/87-1996/97

(In percent of GDP)

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Sources: Commonwealth of Australia; Australian Bureau of Statistics; and Fund staff estimates.

Expenditure less net advances.

A positive number indicates a surplus.

Calculated on an underlying basis.

The underlying budget balance differs from that reported in Table 9 due to the exclusion of provisions.

46. The adjustment in the Commonwealth fiscal position during the current expansion has been slower than in the 1980s.21 This has been an important reason for the continued weakness in national saving. To address this situation, the Commonwealth government announced measures in the 1996/97 budget that are projected to reduce the underlying deficit to around 1 percent of GDP in 1996/97. However, the improvement in the Commonwealth position is likely to be offset by a deterioration at the state government level so that the underlying public sector deficit is projected to remain unchanged at 1½ percent of GDP.22

47. Gross public sector debt stood at 42¾ percent of GDP in June 1996, down from 47¾ percent of GDP in June 1995 (in net terms, outstanding debt declined from 36¾ to 33 percent of GDP). In June 1996, Commonwealth gross debt stood at 25¼ percent of GDP, while net debt was 20¾ percent of GDP. If unfunded employee entitlements are included, net debt of the public sector is 59¾ percent of GDP, while that of the Commonwealth rises to 35 percent of GDP.

48. The new government introduced a Charter of Budget Honesty Bill into parliament in late 1996. The Charter intends to increase the transparency and accountability of the Commonwealth government’s fiscal policy by establishing broad principles of sound fiscal management and enhancing the public reporting on the fiscal situation and outlook.23

B. The Commonwealth Budget

Developments through 1995/96

49. During the 1990s, the Commonwealth government has actively used fiscal policy as a counter-cyclical policy instrument. Initially, it was used to cushion the impact of the economic downturn and to support the recovery, causing the underlying budget deficit to increase to 4¼ percent of GDP (Table 11). Discretionary policy actions on the revenue side included reductions in personal income tax rates in the 1990/91 and 1993/94 budgets, a reduction in the corporate tax rate from 39 to 33 percent in 1993/94, and the introduction of more generous depreciation and investment allowances. The government also increased spending on infrastructure, transfer payments to families, and training in the 1992 “One-Nation” package, and on labor market programs in the 1994 “Working Nation” statement.

Table 11.

Australia: Commonwealth Government Budget, 1991/92-1996/97

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Source: Commonwealth of Australia, Budget Statement, 1996/97.

Excludes net advances.

50. More recently, actions have been undertaken to offset these stimulatory policy measures. The 1993/94 budget announced increases in wholesale sales tax and excise duty rates over 1993/94–1995/96, and corporate tax rates were increased to 36 percent in the 1995/96 budget. As a result of these actions and cyclical factors, the deficit declined gradually to a little over 2 percent of GDP in 1995/96.24 Staff estimates indicate that an improvement in the structural budget position has accounted for about one-half of the actual improvement since 1993/94.

51. The improvement in the budget position has mainly been due to an increase in revenues which rose from 23½ percent of GDP in 1992/93 to 25 percent of GDP in 1995/96 (Table 12 and Chart 8). Growth in tax revenues more than accounted for this increase. Direct tax revenues increased from 16¼ percent of GDP in 1992/93 to 17½ percent of GDP in 1995/96. “Pay-as-you-earn” (PAYE) income tax collections rose by about ½ percent of GDP to 11 percent of GDP over this period, reflecting robust growth in employment. Corporate taxes also increased (by ½ percent of GDP) due to strengthening corporate profitability, changes in the timing of company tax payments which temporarily boosted revenue during 1994/95 and 1995/96, and tax planning by companies in response to the increase in the corporate tax rate from 33 to 36 percent in the 1995/96 budget, which boosted revenue in 1995/96.25 Indirect tax collections strengthened from 5½ percent of GDP in 1992/93 to 6 percent of GDP in 1995/96 due to higher collections from wholesale sales taxes and excise duties as consumption expenditures grew strongly and tax rates were raised. Nontax revenue declined from 1½ percent of GDP in 1992/93 to 1 percent of GDP in 1995/96 due to lower interest payments to the Commonwealth from the states.26

Table 12.

Australia: Commonwealth Budget Revenue, 1991/92-1996/97

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Source: Commonwealth of Australia, Budget Statement, 1996/97.
CHART 8
CHART 8

AUSTRALIA: COMMONWEALTH REVENUES, 1986/87–1996/971/

(In percent of GDP)

Citation: IMF Staff Country Reports 1997, 022; 10.5089/9781451801941.002.A001

Source: Commonwealth of Australia, various budget statements.1/ 1996/97 data are budget estimates.

52. Between 1992/93 and 1995/96, underlying expenditures declined slightly, from 27½ percent of GDP to 27 percent of GDP (Table 13 and Chart 9). Over this period, lower expenditures on defense, economic services, and assistance to other levels of government were partly offset by higher debt interest costs due to the increase in the stock of Commonwealth debt outstanding (Tables 14 and 15). Moreover, social security and welfare expenditures stood at 9½ percent of GDP in 1995/96, only slightly below their cyclical peak in 1993/94. While expenditure on unemployment benefit payments has fallen since 1992/93 (from 2 to 1½ percent of GDP) with the decline in the unemployment rate, other benefit payments, particularly on assistance to families with children, have continued to rise strongly as the government has actively targeted this group. Indeed, expenditures on social security and welfare, excluding unemployment benefits, were about 2 percent of GDP higher in 1995/96 than in the late 1980s (8¼ percent of GDP compared to 6¼ percent of GDP).

Table 13.

Australia: Commonwealth Budget Expenditures, 1991/92-1996/97

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Source: Commonwealth of Australia, Budget Statement, 1996/97.

Includes grants made through state governments and directly to local governments.

Excludes net advances.

CHART 9
CHART 9

AUSTRALIA: COMMONWEALTH EXPENDITURES, 1986/87–1996/97 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 1997, 022; 10.5089/9781451801941.002.A001

Source: Commonwealth of Australia, various budget statements.1/ 1996/97 data are budget estimates.

53. The underlying budget deficit in 1995/96 was some ¾ of a percent of GDP higher than expected at the time of the 1995/96 budget. This was primarily due to a shortfall in revenues, which were about ½ percent of GDP below the budget estimate. Individual tax collections were affected by weaker-than-expected employment growth, and sales tax collections were below budget because of weaker consumption of taxable goods, particularly motor vehicles, and the Senate’s rejection of sales tax measures on building materials. Underlying expenditures were close to the budget forecast. Within this, however, the effect of higher-than-forecast personal benefit payments (mainly owing to unemployment benefit payments) was offset by lower-than-forecast debt interest payments (owing to lower interest rates).

The 1996/97 budget

54. The 1996/97 budget, the first of the new Coalition government, set out a fiscal consolidation plan aimed at moving the underlying budget deficit from 2 percent of GDP in 1995/96 to 1 percent of GDP in 1996/97. This improvement is based on the introduction of net new fiscal measures of about $A 4 billion (or ¾ percent of GDP) in 1996/97.27 These measures are concentrated on expenditure reduction ($A 3 billion), with the government reassessing its existing spending priorities and aiming to achieve greater efficiency and effectiveness in the delivery of public services. As a result, underlying expenditures are projected to decline from 27 percent of GDP in 1995/96 to 26½ percent of GDP in 1996/97.

55. Given the wide ranging review of expenditure priorities undertaken in the budget, a significant part of the savings has been achieved by small reductions in a large number of areas. The major expenditure measures introduced are (with savings expected to be achieved in 1996/97 in brackets):

• a reduction in net assistance to the states ($A 619 million). At the 1996 Premier’s Conference, the states agreed to make fiscal contributions to the Commonwealth in the three years to 1998/99.

• a reduction in the funding of labor market programs ($A 575 million). The aim is to make the programs more cost effective and tightly targeted (see Chapter III.D).

• a 2 percent reduction in departmental running costs ($A 187 million). This is in addition to the ongoing annual 1 percent “efficiency dividend,” which has been applied to running costs in recent years.

• increased contributions for higher education ($A 133 million). Contribution rates for course costs will be raised, and income thresholds for contributions lowered.

• a reduction in national highway funding ($A 113 million). Savings are to be made in maintenance costs.

56. However, offsetting some of these savings were expenditure commitments made during the election campaign in the areas of private health insurance incentives (negligible in 1996/97, but important thereafter) and the family tax initiative.28 The government also introduced a gun buy-back scheme which is to be fully funded by a one-off increase in the Medicare levy.

57. Revenues are budgeted to increase slightly, from 25 percent of GDP in 1995/96 to 25¼ percent in 1996/97. This increase is attributable to the full year impact of measures introduced in the 1995/96 budget, primarily the increase in the corporate tax rate, and to new measures in the 1996/97 budget. These latter aim mainly to stem revenue losses from tax expenditures, particularly in the areas of private pensions (“superannuation”), research and development, and tariff concessions (these will significantly affect revenues starting in 1997/98).29 With regard to superannuation, the budget imposed a 15 percent surcharge on tax deductible contributions made by employers and the self-employed on behalf of high-income earners, while the premium rate for deductions under the research and development tax concession has been reduced from 150 percent to a maximum of 125 percent.

C. State Governments

58. Fiscal consolidation by the state general government sector since the early 1990s has seen their underlying budget position move from a deficit of ¾ percent of GDP in 1992/93 to a surplus of ¾ percent of GDP in 1995/96 (Table 16 and Chart 10). The consolidation strategies followed by the various states have had a number of common features: growth in current outlays have been reduced by improving the efficiency of public sector service delivery; privatization programs have been initiated; 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. These measures have enabled the states to be more successful than the Commonwealth in controlling their outlays. In particular, current outlays have been decisively reduced, from 15 percent of GDP in 1992/93 to 13¾ percent of GDP in 1995/96. However, revenues have declined slightly as higher own-source revenues have been more than offset by declining Commonwealth transfers.

Table 14.

Australia: Commonwealth Budget Expenditures by Function, 1991/92-1996/97

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Source: Commonwealth of Australia, Budget Statement, 1996/97.

Excludes net advances.

Table 15.

Australia: Commonwealth Government Public Debt Interest, 1991/92-1996/97

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Source: Commonwealth of Australia, Budget Statement, 1996/97.
Table 16.

Australia: State General Government Finances, 1991/92-1996/97

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Source: Australian Bureau of Statistics, Government Financial Estimates Australia, 1996/97.

ABS projection, based on 1996/97 state government budgets.

Excludes net advances.

+/- surplus/deficit.

CHART 10
CHART 10

AUSTRALIA: STATE GENERAL GOVERNMENT FINANCES, 1991/92–1996/971/

(In percent of GDP)

Citation: IMF Staff Country Reports 1997, 022; 10.5089/9781451801941.002.A001

Source: Australian Bureau of Statistics.1/ 1996/97 data are ABS projections, based on Commonwealth and state budgets.

59. The strong fiscal performance of the state government sector in 1995/96 (the underlying budget moved from broad balance in 1994/95 to a surplus of ¾ percent of GDP) was mainly due to developments in New South Wales (NSW) and Victoria, and was partly caused by one-off factors. In Victoria, capital expenditure fell well short of the usual government target of 1¼ percent of gross state product, while own-source revenues grew strongly (taxes, fees, and fines grew by 11 percent compared to an average of a little over 7 percent in the other states) due to a large increase in stamp duties from the privatization of parts of the electricity industry.

60. The state budgets for 1996/97 indicate a significant deterioration in the states’ fiscal position, with the underlying surplus expected to decline to ¼ percent of GDP. On the spending side, this deterioration reflects higher current expenditures, particularly in relation to health and education, and increased capital outlays, driven by infrastructure development in Queensland to accommodate its rapidly increasing population, and Olympics-related expenditure in NSW. Revenue growth will also be slower, reflecting the absence of the one-off factors present in 1995/96 and the impact of the states’ contribution to the Commonwealth’s fiscal consolidation.

D. Nonfinancial Public Trading Enterprises and Asset Sales

61. The PTE sector has undergone significant change in recent years, with an increased emphasis on profitability and operating efficiency, and privatization as governments have reassessed the appropriateness of publicly owned enterprises competing with similar private sector companies. This process has been given further impetus by the national competition policy framework (see Chapter VII.A).

62. The impact of the reforms on the financial performance of the PTE sector has been marked. The financial position of the sector moved into a surplus in 1991/92 for the first time since data was collected, although this surplus has now declined from the peak of 1 percent of GDP recorded in 1993/94 to ¼ percent of GDP in 1995/96 (Table 17 and Chart 11). As well as the improved efficiency with which the businesses are now operated, an ongoing decline in capital expenditure from the peaks recorded in the early 1980s has also been important.30

Table 17.

Australia: Public Trading Enterprises’ Operations, 1991/92-1996/97

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Source: Australian Bureau of Statistics, Government Financial Estimates Australia, 1996/97.

ABS projection.

Excludes net advances.

+/- surplus/deficit.

Net operating surplus less subsidies received plus net interest receipts.

CHART 11
CHART 11

AUSTRALIA: PUBLIC TRADING ENTERPRISES’ OPERATIONS, 1991/92–1996/971/

(In percent of GDP)

Citation: IMF Staff Country Reports 1997, 022; 10.5089/9781451801941.002.A001

Source: Australian Bureau of Statistics.1/ 1996/97 data are ABS projections, based on Commonwealth and state budgets.

63. Governments at both the Commonwealth and state levels have followed active privatization programs in recent years. During 1995/96, the Commonwealth government sold its shares in Qantas Airlines for $A 1½ billion. In July 1996, it sold its remaining stake in the Commonwealth Bank for around $A 5 billion, and has also recently sold Commonwealth Funds Management to the Commonwealth Bank for $A 60 million. At the state level, the Victorian government continued to sell its electricity assets in 1995/96.

64. In late 1996, parliamentary approval was obtained for the sale of one-third of the government-owned telecommunications company Telstra (probably worth $A 8–10 billion), paving the way for this to take place in 1997/98. Other planned major asset sales at the Commonwealth level include the sale of long-term leases for all the Federal airports. The sale process for the first three airports (Brisbane, Melbourne, and Perth) is well advanced, and bids are expected in the first half of 1997. The Victorian government has also announced plans for the privatization of its gas industry (see Chapter VII.A).

V. Financial Sector

A. Monetary Policy Developments

65. 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.31 This objective was recently endorsed by the new government in a joint statement by the Treasurer and newly appointed Governor. Consistent with this approach, monetary policy was tightened substantially in late 1994 (the official cash rate was raised by 2¾ percentage points to 7½ percent) after an acceleration in domestic demand caused a deterioration in the inflation outlook and a sharp increase in long-term interest rates. Nevertheless, annual underlying consumer price inflation moved above the 2–3 percent range in the September 1995 quarter and remained above the target until the September 1996 quarter, when it fell to 2½ percent. As the outlook for inflation improved in the second half of 1996, the Reserve Bank reduced the official cash rate in three steps to 6 percent.

B. Developments in the Monetary Policy Framework

66. Since 1993, the Reserve Bank has implemented monetary policy within an inflation-targeting framework. This has helped lock in the sharp decline in inflation that took place in the early 1990s. Although this approach was informally endorsed by the government on a number of occasions, it was not until August 1996 that the endorsement was made formal by the new government in a joint policy statement by the Treasurer and the newly appointed Governor.32 The joint statement placed considerable emphasis on the price stability objective. It noted that the objectives of the Reserve Bank Act allow the Bank to focus on price stability, while taking account of the implications of monetary policy for activity and, therefore, employment in the short term. Further, the statement recognized price stability as a crucial precondition for sustained growth in economic activity and employment. The statement included a formal commitment to the target by the Governor of the Reserve Bank, supported by the government’s endorsement, and emphasized the role that disciplined fiscal policy must play in achieving the target.

67. In a far-reaching move to assess the implications for the regulatory framework of global trends in the financial sector, the new government has established an inquiry into Australia’s financial system. The inquiry is expected to report by March 31, 1997 (see Box 1).

Wallis Inquiry into the Financial System

The government has established an inquiry into Australia’s financial system, headed by Mr. Stan Wallis, the former head of a prominent manufacturing firm. Its terms of reference are:

  • to take stock of the results arising from financial sector deregulation since the early 1980s;

  • to identify forces for change, in particular technological development;

  • to seek to establish a consistent regulatory framework for similar financial products; and

  • to recommend regulatory change that will develop a more efficient, responsive, competitive, and flexible financial system to underpin stronger economic performance, consistent with financial stability, prudence, integrity, and fairness.

Although the Inquiry has summarized the initial submissions and laid out some options in these areas, no recommendations have been made as yet. The Inquiry is due to make its final report by March 31, 1997.

The development of a consistent regulatory framework for banks, building societies, insurance companies, and superannuation funds will be one of the most important subjects considered by the Inquiry. The various financial service providers have been critical of the existing financial regulation, which they claim is unwieldy and overlapping.1 The Inquiry has laid out options for reform, including establishing a single “mega” regulatory agency, or establishing two or more agencies (one charged with more intense regulation of institutions where systemic risk and/or depositor protection requirements are strongest, and the other(s) providing less intense regulation in the remaining areas).

Another important area for the Inquiry is the approach to prudential supervision of banks. The Treasury has proposed to the Inquiry that the current approach, under which the Reserve Bank of Australia supervises banks in line with international standards, should be complemented with a more demanding public disclosure regime to bring greater market discipline to bear on institutions to behave prudently. The Treasury sees greater public disclosure as complementing, rather than replacing, the traditional approach to prudential supervision.

The Inquiry is considering some options regarding depositor protection, including amending the Banking Act to make it clear that no government guarantee exists in any area of the financial system, or, alternatively, establishing means for making any guarantees or their funding explicit.

Some key issues concerning mergers and foreign ownership in the financial sector have been raised in the Inquiry. These include: (1) whether an economy-wide policy such as the Trade Practices Act alone provides the best framework for deciding on the competition implications of mergers in the financial system; or (2) whether prudential concerns, particularly a need to prevent concentration of risk, argue for an additional process of assessment (under the “six pillars policy” mergers among the four largest banks and two largest life insurance offices are restricted at present). The Inquiry is also examining the issue of whether public policy grounds exist for restrictions on foreign acquisitions in the banking and insurance industries (at present foreign ownership of the four largest banks is restricted).

1Currently, there are four main regulatory bodies that oversee financial markets: Reserve Bank of Australia (for banks); Australian Financial Institutions Commission (for nonbank deposit takers); Australian Insurance and Superannuation Commission (for insurance companies and superannuation funds); and Australian Securities Commission (for financial advisors).

C. Interest Rate Developments

68. Movements in long-term interest rates in recent years have largely reflected changes in the outlook for inflation and the current account balance over the various stages of the economic expansion.

69. Both long and short-term interest rates fell significantly in the early 1990s, because of the recession and the fall in inflation. Rates continued to fall during the early stages of the economic recovery, with long-term bond yields reaching 6¾ percent by end-1993 as inflationary pressures remained subdued because of the considerable slack in the economy following the recession (Table 18 and Chart 12).

Table 18.

Australia: Selected Interest Rates, 1986/87-1996/97

(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. Average of daily figures for the month.

Weighted average yield of notes alloted at the 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 $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 12
CHART 12

AUSTRALIA: INTEREST RATES, 1986/87–1996/97

(In percent)

Citation: IMF Staff Country Reports 1997, 022; 10.5089/9781451801941.002.A001

Source: Reserve Bonk of Australia, Bulletin.1/ Yield on 10-year bonds less the 12-month ended change in underlying inflation.

70. In early 1994, as economic activity accelerated, long-term rates rose sharply, reaching more than 10 percent by late 1994. The increase was driven by expectations of higher inflation, renewed concerns about the exchange rate following the widening in the current account deficit, as well as trends in international markets. The differential between Australian and U.S. long-term bond yields widened substantially, from a low of about 60 basis points in January 1994 to about 250 basis points by mid-1994 (Chart 13).

CHART 13
CHART 13

AUSTRALIA: INTEREST RATE SPREADS, 1986/87–1996/97

(In percent)

Citation: IMF Staff Country Reports 1997, 022; 10.5089/9781451801941.002.A001

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

71. In late 1994, as the (positively sloped) yield curve steepened and aggregate demand accelerated to an unsustainable pace, monetary policy was tightened, with the Reserve Bank raising the official cash rate from 4¾ percent to 7½ percent in three steps. This resulted in a flattening of the slope of the yield curve. The yield curve flattened further in 1995 as the Reserve Bank maintained the official cash rate at 7½ percent throughout the year and long-term yields fell to an average of about 9 percent. However, the fall in bond yields was in line with the global bond market rally and the yield differential with U.S. bonds remained sizable, fluctuating around an average of 260 basis points in 1995.

72. The differential between Australian and U.S. long-term bond yield began to narrow again in early 1996. This was prompted by growing market confidence in the new government’s fiscal strategy as well as an improved outlook for inflation and a reduction in the current account deficit that resulted from the moderation of domestic demand during the third stage of the expansion. Subsequently, the easing of monetary policy by the Reserve Bank in July 1996 (with a 50-basis point reduction in the official cash rate), combined with the announcement of the new government’s budget in August, and the associated “positive outlook” for the credit rating announced by Standard and Poor’s, added to the bullish market sentiment regarding Australian bonds. As a result, long-term bond yields fell to less than 7½ percent by end-1996. With U.S. yields little changed over the same period, the differential between Australian and U.S. yields fell to about 100 basis points. Spreads also narrowed significantly against other major countries.

73. In line with the fall in nominal yields, the real yield on long-term bonds33 fell to about 5½ percent by late 1996. This level was well below the peak of about 7½ percent reached in 1994/95 (on average) during the second stage of the expansion, but was above the levels reached in late-1993 when real long-term bond yields fell below 5 percent for a short period.

74. The Reserve Bank announced further easings of monetary policy in November and December 1996, with a cumulative reduction in the official cash rate of 100 basis points to 6 percent. The Bank noted that these were based on the improved outlook for inflation, which increased the scope for the economy to sustain a faster pace of growth. Following the cuts to the official cash rate, most financial intermediaries announced cuts to housing and business loans, and fixed rate deposits by a similar amount. The predominant standard variable housing loan rate stood at 8¼ percent at end-1996, down from about 10½ percent on average in 1995/96. The reduction in the home mortgage rate exceeded the reduction in the official cash rate by about three-quarters of a percentage point because of increased competition in the home mortgage market, particularly from nonbanks. Interest rates on business loans were also cut, with the small business indicator rate falling to 9½ percent at end-1996.

D. Developments in Credit and Monetary Aggregates

75. Private sector credit accelerated during the first half of the 1990s, reflecting trends in economic activity. Thus, after contracting slightly during 1991/92, growth in the stock of total private sector credit accelerated to about 9 percent in 1994/95, and 11½ percent in the year to September 1996 (Table 19 and Chart 14). Following the sectoral pattern of economic growth, the pickup in credit demand was led initially by the housing sector, fueled by declines in mortgage interest rates, and by competition between banks and other financial institutions. Growth in housing credit slowed significantly over the course of 1995 and 1996, giving way to stronger growth in personal credit (mainly loans for the purchase of motor vehicles) and business credit. 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. Business credit growth peaked at 15 percent in the year to March 1996, before easing somewhat to 13 percent in the year to September 1996.

Table 19.

Australia: Credit Aggregates, 1993/94-1996/97 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 14
CHART 14

AUSTRALIA: MONEY AND CREDIT AGGREGATES, 1986/87–1996/97

(Annual percent change)

Citation: IMF Staff Country Reports 1997, 022; 10.5089/9781451801941.002.A001

Source: Reserve Bank of Australia, Bulletin.

76. The expansion in private sector credit has also been reflected in broad money34 and M3, with annual growth rebounding from 1–3 percent in 1991/92 to about 8–9 percent in September 1996 (Table 20). The growth rates of broad money and M3 are currently somewhat higher than nominal GDP growth, but lower than for total credit growth because financial intermediaries have funded much of their lending from capital rather than through borrowing.

Table 20.

Australia: Money Supply, 1993/94-1996/97 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 latter’s holdings of currency and bank deposits.

77. Growth in the monetary base in 1995/96 (at about 4½ percent) was lower than for the other monetary and credit aggregates. In September 1996, growth jumped to an annual rate of 30 percent, but this was due to a change in institutional arrangements that resulted in higher deposits of banks with the Reserve Bank.35

VI. External Sector

A. Overview

78. The evolution of Australia’s economic expansion has been closely mirrored in its external accounts. Initially, when growth was weak, the current account deficit reached a cyclical low of 3 percent of GDP in 1991/92 (Table 21 and Chart 15). The current account deficit then widened to almost 4 percent of GDP in 1993/94 as the recovery in domestic demand led to an acceleration in imports that more than offset robust export growth. In 1994/95, as the economic expansion accelerated and a severe drought hit rural exports, the deficit rose sharply, reaching about 6¼ percent of GDP. The widening of the current account deficit renewed financial market concerns about the sustainability of the external position, which contributed to a sharp depreciation of the exchange rate in early 1995. However, the exchange rate rebounded in 1995/96, as the current account deficit narrowed to about 4¼ percent of GDP. The recent improvement in the current account stemmed from slower import growth as the pace of domestic demand moderated, combined with a recovery in rural export volumes, strong growth in manufacturing and service exports, and an improvement in the terms of trade.

Table 21.

Australia: Balance of Payments Summary, 1991/92-1996/97

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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, 1990=100; real effective exchange rate is CPI based on relative consumer prices.

CHART 15
CHART 15

AUSTRALIA: EXTERNAL CURRENT ACCOUNT, 1986/87–1996/97

(In percent of GDP)

Citation: IMF Staff Country Reports 1997, 022; 10.5089/9781451801941.002.A001

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

79. The current account deficits in recent years have been readily financed by capital inflows. As a consequence, the stock of net external liabilities has risen from about 53¾ percent of GDP at end-June 1993 to 58½ percent of GDP at end-September 1996. However, as much of this buildup has taken the form of equity claims, the net external debt/GDP ratio declined over the same period from 41½ to 39 percent of GDP. Nonofficial sector debt accounted for about two-thirds of the external debt outstanding at end 1995/96.

B. Merchandise Trade

80. The merchandise trade balance has been the main driving force behind developments in the current account deficit in recent years (Table 22). The trade account was in approximate balance in 1992/93 and 1993/94, but moved sharply into deficit in 1994/95 (1¾ percent of GDP) before improving to a deficit of a little less than ½ percent of GDP in 1995/96.

Table 22.

Australia: Current Account, 1991/92-1996/97 1/

(In millions of Australian dollars)

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

Quarterly data are seasonally adjusted.

81. The most important factor underlying the shifts in the merchandise trade balance was the variation in the strength of import demand (Table 23 and Chart 16). As domestic demand strengthened in 1994/95, driven by strong private investment growth, imports of capital goods surged by 35 percent in volume terms, contributing to total import volume growth of 20 percent. In 1995/96, as domestic demand growth moderated, import volume growth fell to 6 percent, with imports of capital goods growing by about 15 percent, and consumer, raw material and intermediate goods growing by about 3 percent in volume terms. More recently, total import volume growth picked up slightly (to about 8¼ percent in the year to September 1996), due to stronger growth in imports of consumer goods.

Table 23.

Australia: Merchandise Exports and Imports, 1991/92-1996/97 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 16
CHART 16

AUSTRALIA: IMPORT VOLUME DEVELOPMENTS, 1986/87–1996/97

Citation: IMF Staff Country Reports 1997, 022; 10.5089/9781451801941.002.A001

Source: Australian Bureau of Statistics.

82. Export fluctuations also played a role in the trade balance turnaround. In 1994/95 a severe drought reduced agricultural production and export volume growth fell to 2 percent. In 1995/96, volume growth rebounded to almost 11 percent, as rural exports recovered, and manufactured export volumes continued to grow strongly (20 percent). More recently, growth of manufacturing exports has slowed (to about 12½ percent in volume terms in the year to September 1996) while growth in rural exports has increased (to about 14½ percent in volume terms in the year to September 1996) thereby maintaining overall export volume growth at about 9½ percent in the year to September 1996.

83. Movements in the terms of trade have had a significant impact on the trade balance in the 1990s. Between 1989/90 and 1993/94, the terms of trade deteriorated by 13½ percent, adversely affecting the merchandise trade balance. Subsequently, the terms of trade rebounded, as commodity prices were supported by strong international growth, and the 11 percent cumulative increase in the terms of trade in 1994/95 and 1995/96 almost fully reversed the deterioration in the early 1990s. By September 1996, the terms of trade had recovered to almost 3 percent above the average for the past 20 years.

84. 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 almost 15 percent per annum, and manufactured goods now account for 27 percent of all merchandise exports, compared with 12¾ percent in 1984/85 (Table 24 and Chart 17). However, nonrural commodities remain the largest export group, accounting for almost 45 percent of merchandise exports in 1995/96. Exports to ASEAN countries now account for 15½ percent of all merchandise exports, compared with 8¾ percent in 1988/89 (Table 25) The largest single market for Australian goods is Japan, which accounted for 21½ percent total merchandise exports in 1995/96. Other important markets are Korea, New Zealand and the United States, which each account for 6–9 percent of merchandise exports, and the European Union which accounts for 11 percent of merchandise exports.

Table 24.

Australia: Exports by Commodity Group, 1991/92-1995/96

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Source: Australian Bureau of Statistics, Balance of Payments Australia.
CHART 17
CHART 17

AUSTRALIA: EXPORT VOLUME DEVELOPMENTS, 1986/87–1996/97

Citation: IMF Staff Country Reports 1997, 022; 10.5089/9781451801941.002.A001

Source: Australian Bureau of Statistics.
Table 25.

Australia: Direction of Trade, 1993/94-1995/96

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Source: Australian Bureau of Statistics.

Trade statistics basis.

Association of Southeast Asian Nations.

C. Invisibles

85. The invisibles balance has generally been dominated by a substantial net factor income deficit, with a considerably smaller deficit on the net nonfactor account, and a modest surplus on the transfers account. With respect to net factor income, the deficit has widened from about 3½ percent of GDP in 1992/93 to 4¼ percent of GDP in 1995/96 (Chart 18). Net interest payments have remained roughly stable at about 2¼ percent of GDP (or about 11–12 percent of exports of goods and services, well below the peak of over 20 percent at the end of the 1980s) (Table 26). However, earnings on equity investment in Australia have risen rapidly, reflecting the strong performance of the domestic economy.

CHART 18
CHART 18

AUSTRALIA: INVESTMENT INCOME, 1986/87–1995/96

(In percent of GDP)

Citation: IMF Staff Country Reports 1997, 022; 10.5089/9781451801941.002.A001

Source: Australian Bureau of Statistics.
Table 26.

Australia: Gross and Net External Interest Payments, 1991/92-1996/97

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

Data are not seasonally adjusted.

86. The net nonfactor services deficit improved from a deficit of about ½ percent of GDP in 1992/93 to near balance in 1995/96, mainly reflecting strong growth in travel receipts (which averaged about 17 percent per annum over the past three years), but also due to solid growth in business service receipts. Net transfer receipts (public and private) fell from around ½ percent of GDP in the early 1990s to near balance in 1993/94, before recovering to ¼ percent of GDP in 1995/96. The trend decline was mainly due to a change in immigration policy, which gave greater emphasis to individual skills, rather than financial assets, as a determinant of eligibility.

D. Capital Account and External Liabilities

Developments in capital account flows

87. In contrast with the experience of the 1980s, when private and public debt increased substantially, the composition of capital flows in recent years has been more evenly balanced between debt and equity financing (Table 27). Since 1990/91, the average net debt/equity financing ratio was 52:48, but has been volatile, ranging from 94:6 in 1991/92 to 9:91 in 1993/94.

Table 27.

Australia: Capital Account Summary, 1991/92-1996/97

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

Includes accounts receivable and prepayments made.

Includes accounts payable and prepayments received.

88. Official net capital inflows, which have been mainly driven by state government borrowing in the international markets, fell to less than ½ percent of GDP in 1995/96 from an average of about 2½ percent of GDP over the previous three years (Chart 19). The fall in 1995/96 was due to sizable net repayments by state governments as their fiscal situation improved, in contrast to the sizable net borrowing in earlier years. However, this was more than offset by increased borrowing by the Commonwealth government, primarily in the form of nonresident purchases of Australian dollar denominated government securities.

CHART 19
CHART 19

AUSTRALIA: CAPITAL FLOWS, 1986/87–1995/96

(In percent of GOP)

Citation: IMF Staff Country Reports 1997, 022; 10.5089/9781451801941.002.A001

Source: Australian Bureau of Statistics.

89. Nonofficial net capital inflows have increased steadily since 1992/93, when a small net outflow was recorded (Table 28 and Charts 20 and 21). By 1995/96, net inflows reached 3¾ percent of GDP, driven by increased retained earnings of foreign-owned firms (in line with stronger corporate profits during the economic expansion) and higher borrowing, particularly in 1995/96. Gross inflows and outflows of nonofficial capital were higher in 1995/96 than in any other year in the 1990s, but were still below the peak recorded in the 1980s.

Table 28.

Australia: Capital Account - Nonofficial, 1991/92-1996/97

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

Includes accounts payable and prepayments received.

CHART 20
CHART 20

AUSTRALIA: NONOFFICIAL CAPITAL INFLOWS, 1986/87–1995/96

(In percent of GDP)

Citation: IMF Staff Country Reports 1997, 022; 10.5089/9781451801941.002.A001

Source: Australian Bureau of Statistics.
CHART 21
CHART 21

AUSTRALIA: NONOFFICIAL CAPITAL OUTFLOWS, 1986/87–1995/96

(In percent of GDP)

Citation: IMF Staff Country Reports 1997, 022; 10.5089/9781451801941.002.A001

Source: Australian Bureau of Statistics.

90. Net borrowing36 by the nonofficial sector increased to almost 2 percent of GDP in 1995/96, in contrast with relatively small net borrowing in 1994/95 and sizable debt repayments in earlier years as corporations repaid debt. Gross borrowing reached 4 percent of GDP in 1995/96, as a result of short-term borrowing by banks and corporations, the latter in particular reflecting the strengthened the capacity of the private sector to borrow following the restructuring of corporate balance sheets in the early 1990s. The increased borrowing from abroad in 1995/96 was offset in part by increased lending abroad which reached about 2 percent of GDP, well above the level of recent years.

91. Net equity flows have been relatively strong in the past three years, averaging about 2¼ percent of GDP per annum, somewhat higher than the levels of the late 1980s and early 1990s. This was mainly due to flows of direct investment, although in 1993/94, portfolio equity investment in Australia increased sharply to 3½ percent of GDP. Direct equity investment has increased steadily since 1991/92 solely because of increased retained earnings, reflecting higher corporate profitability as a result of the economic expansion. By 1995/96, direct equity investment had reached almost 2½ percent of GDP, the highest level since the late 1980s, with retained earnings comprising about half of the total. Direct equity investment abroad also increased in 1995/96 to reach over 1 percent of GDP, reflecting the increasing globalization of Australian firms.

External debt and liabilities

92. 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 external liabilities and net external debt (Table 29 and Chart 22). More recently, net external liabilities37 rose from 53¾ percent of GDP at end-June 1993 to 58½ percent of GDP at end-September 1996, while net external debt fell over the same period from a peak of 41½ percent of GDP to 39 percent of GDP. The fall in the net debt/GDP ratio reflects the predominance of equity financing over debt financing, as well as valuation gains from the appreciation of the Australian dollar and strong growth in GDP, over the past three years. The rise in the net equity/GDP ratio not only reflects the sizable equity financing, but also reflects the reduction in the Australian dollar valuation of equity investment abroad by Australian residents (and thereby a rise in net equity claims on Australia) as a result of the appreciation of the exchange rate in recent years.

Table 29.

Australia: External Assets and Liabilities, 1991/92-1996/97 1/

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

As at end of the period, excluding accounts receivable and payable.

Quarterly data are seasonally adjusted.

CHART 22
CHART 22

AUSTRALIA: EXTERNAL LIABILITIES, 1980/81–1995/96

(In percent of GDP)

Citation: IMF Staff Country Reports 1997, 022; 10.5089/9781451801941.002.A001

Source: Australian Bureau of Statistics.

93. Gross external debt increased by over $A 31 billion during the past three years (to reach $A 241 billion at end-September 1996), while the gross debt/GDP ratio fell over the same period by almost 3 percentage points to 49 percent of GDP at end-September 1996. Chart 23 provides a breakdown of gross external debt between the official sector, public enterprise sector, and the private sector (both financial and trading enterprises). About 60 percent of the increase in gross external debt since June 1993 was attributable to the official sector. Of the official debt, about three-quarters of the increase was due to Commonwealth government borrowing while the remainder was due to borrowing by the states and local governments. However, even though official debt has grown more rapidly than non-official debt in recent years, nonofficial debt accounted for two-thirds of the debt outstanding at end-September 1996 due to the sizable private debt financing in the 1980s.

CHART 23
CHART 23

AUSTRALIA: GROSS EXTERNAL DEBT, 1980/81–1995/96

(In percent of GOP)

Citation: IMF Staff Country Reports 1997, 022; 10.5089/9781451801941.002.A001

Source: Australian Bureau of Statistics.

94. Official reserves increased in 1996 to the levels prevailing in 1990/91, as a result of modest purchases of foreign exchange from the market by the Reserve Bank in the past 18 months. At end-September 1996, official reserves of the Reserve Bank amounted to almost $A 22 billion and comprised about 44 percent of Australia’s holding of external financial assets (Table 30).

Table 30.

Australia: Gross Official Reserve Assets, 1991/92-1996/97

(In millions of Australian dollars; end of period)

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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.

95. The currency composition of the external debt has shifted significantly over the past decade (Table 31 and Chart 24), as both the private and official sector moved to reduce their exposure to foreign currency denominated debt.38 Consequently, the proportion of external debt denominated in Australian dollars almost doubled between 1985/86 and 1995/96. Debt denominated in U.S. dollars has declined over this period (from 44 percent of the total to 33 percent), and debt in other foreign currencies has fallen from 30 percent to 20 percent of the total (although debt denominated in Japanese yen remained at about 9–10 percent of the total over the same period). The maturity profile of the external debt domiciled abroad has also shortened considerably, with the proportion of debt maturing in less than one year more than doubling from 19 percent in 1985/86 to 43 percent in 1995/96. Banks, in particular, have been large borrowers of short-term funds.

Table 31.

Australia: Maturity Structure and Currency Composition of Gross External Debt, 1991/92-1995/96

(Percent of total debt)

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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 24
CHART 24

AUSTRALIA: COMPOSITION AND MATURITY OF EXTERNAL DEBT

(In percent of total debt outstanding)

Citation: IMF Staff Country Reports 1997, 022; 10.5089/9781451801941.002.A001

Source: Australian Bureau of Statistics.

E. Exchange Rate Developments

96. Australia’s nominal and real effective exchange rates fell sharply in the early 1980s, after the currency was floated, but since then have fluctuated around a stable long-term trend (Table 32 and Chart 25). In general, the fluctuations have followed the terms of trade. Hence, when Australia’s commodity prices strengthened in the late 1980s, the nominal and real exchange rates appreciated, and when the terms of trade weakened in the early 1990s, they depreciated. By 1993, the real effective exchange rate had fallen to about 11 percent below the average for the late 1980s and early 1990s, or almost 30 percent below the level prior to the floating of the Australian dollar in 1983. The relatively competitive level of the exchange rate in the late 1980s and early 1990s has contributed to strong growth recorded in manufactured exports.

Table 32.

Australia: Period Average Exchange Rates, 1991/92-1996/97

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

Excludes Brasil.

Based on relative consumer prices.

From the preceding period.

CHART 25
CHART 25

AUSTRALIA: EXCHANGE RATE AND TERMS OF TRADE, 1986/87–1996/97

Citation: IMF Staff Country Reports 1997, 022; 10.5089/9781451801941.002.A001

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

97. Both the nominal and real effective exchange rates remained relatively stable in 1993/94 and 1994/95 on average, although this masked an appreciation in the first half of 1994/95 followed by a sharp depreciation in the second half of 1994/95, which stemmed from concerns about the widening of the current account deficit. The exchange rate rebounded in the first half of 1995/96, as result of the improvement in the terms of trade, a fall in the current account deficit, and ongoing demand for Australian assets by Japanese investors, in particular, attracted by higher yields on offer. In early 1996, the exchange appreciated further and, by late 1996, both the nominal and real effective exchange rates were about 10 percent above their levels a year earlier. This appreciation reflected a further improvement in the terms of trade, increased financial market confidence in the new government’s medium-term fiscal consolidation strategy and an improved outlook for inflation, that also contributed to the fall in long-term interest rates.

VII. Competition Policy in Australia39

A. National Competition Policy and Related Reforms

98. Individual governments in Australia have pursued separate microeconomic reform agendas since the mid-1980s. While some of these have occurred solely in one jurisdiction (for example tariff reductions at the Commonwealth level), others have occurred across the different levels of government, including the corporatization and privatization of public trading enterprises, and the improved efficiency in the operation of government departments. In April 1995, the Council of Australian Governments (COAG) agreed to introduce a national competition policy and law.40 This policy package seeks to extend competition to those sectors of the economy that have remained sheltered from competitive pressures, especially the public enterprises, but also the professions and unincorporated enterprises. Equally significant, the package imposes a framework that gives the ongoing reforms a national focus and coordinated timing.

99. The potential benefits of the structural reforms under the competition policy package are large. Modeling work conducted by the Industry Commission41 with a detailed sectoral model of the Australian economy suggests that in the long run the reforms could result in real GDP being 5½ percent higher than at present. The benefits of the reforms are also likely to be widely distributed because the broad base of the reforms ensures that sectors which lose from one reform gain from others. Reform of the electricity and gas, telecommunication, and rail sectors are projected to have particularly large benefits for the economy as a whole.

100. Implementation of the national competition policy has already begun. Legislation has been passed so that the conduct code agreement of the Trade Practices Act (TPA) now applies to all areas of the economy. The Commonwealth and each of the states have also published statements detailing how they plan to implement the competition principles. These statements establish schedules for the review of government regulations to ensure they do not unnecessarily inhibit competition; set out how the government will ensure competitive neutrality between public and private sector businesses; and for the state and territories, explain how the policy will be applied to local governments. These statements are currently being examined by the National Competition Council (NCC) to ensure they satisfy the requirements of the competition agreements.

101. The related reforms are at various stages of implementation, with progress being most advanced in the electricity sector.

• Electricity: traditionally, electricity has been supplied by state government authorities on a monopoly basis. Now, however, the aim is to establish a fully competitive national market for electricity with all customers having a choice of electricity supplier. To do this, each jurisdiction is required to separate the generation, transmission, and distribution businesses and to corporatize them. Most progress has been made in NSW, Queensland, and Victoria. In NSW and Queensland, the corporatized businesses will remain in public ownership, while in Victoria they are being privatized (5 distribution and 2 generation companies have so far been sold for around $A 13 billion). A competitive market in wholesale electricity has already been established in both NSW and Victoria, and interstate competition will begin in July 1997. The other states and territories are moving more slowly, but are on track to meet their COAG commitments. Moreover, although the reforms are still at an early stage, benefits are already starting to flow to consumers. Between 1990/91 and 1994/95, electricity prices declined by about 6 percent in real terms. However, reductions have not been uniform; prices for industrial and commercial customers fell by 11 percent, but those for residential customers rose by 3¾ percent as previous cross-subsidies were unwound.42

• Gas: traditionally, gas has been supplied through a monopolistic mixture of private and public sector ownership. In the future, however, legislative and regulatory barriers to trade in natural gas will be removed; a uniform national framework for third party access to both inter and intrastate supply networks established; and publicly owned gas utilities will be placed on a more commercial footing, including through the vertical separation of transmission and distribution activities. The Victorian government has recently released provisional plans for its gas industry. These involve the break up of GASCOR, the state-owned gas distribution and retailing operation, into two or three distribution businesses and between two and five retailers. These will then be privatized. The high pressure gas pipelines operated by the state-owned Gas Transmission Company will be kept in a single entity and sold. New pipeline investment will be open to competition and new retailers will be able to enter the market. It is expected that major gas users will be able to choose their supplier by mid-1998, and all users will have choice by mid-2001. Regulatory oversight will be similar to that for electricity with a transitional price path pegged below the rate of inflation.

• Water: the February 1994 COAG meeting endorsed a strategic framework for the efficient and sustainable reform of the water industry, which includes the institutional reform of the industry and the pricing of urban and rural water.

• Road transport: since 1991, there has been a program of reform to achieve nationally consistent technical and operating regulations and road user charges for heavy vehicles based on full cost recovery. This has been achieved through the National Road Transport Commission (NRTC), a joint Commonwealth, state and territory body established for the purpose.

102. Other areas (mainly at the Commonwealth level) where significant reforms are being undertaken include:

• Telecommunications: deregulation of the telecommunications industry began in 1991 with the introduction of a carrier duopoly43 to replace the incumbent monopoly. From July 1, 1997, there will be full and open competition in telecommunications with no restriction on the number of providers or installers of network infrastructure, and no industry specific limits on foreign investment in new carriers (the standard provisions of the Foreign Acquisitions and Takeovers Act 1975 will apply).44 The new competitive framework will be administered by the Australian Competition and Consumer Commission (ACCC), rather than an industry regulator. The government has recently passed legislation for the sale of one-third of Telstra. This is expected to take place in 1997/98, with 35 percent of the share float being made available to foreign investors.

• Financial services: Australia has undertaken trade liberalization commitments in the WTO covering the financial services sector. An agreement was reached in July 1995 under which all participants offered to provide nondiscriminatory access to their banking, insurance, and securities markets according to a formally scheduled offer. The principal General Agreement on Trade in Services (GATS) restrictive measures detailed in Australia’s offer include: the application of foreign investment policy in the financial services sector; the existence of state level restrictions in some areas of compulsory insurance provision; the requirements for the establishment of foreign bank branches in Australia; and restrictions on the acquisition of a controlling interest in any of the four major banks.

• Aviation: Australia is planning to adopt a more open charter policy, to continue to pursue increases in exchanges of capacity entitlements and expansion of route rights, and to support initiatives coming out of the Asia Pacific Economic Corporation (APEC) small group on more competitive air services. Further, it will continue to progressively liberalize access to the Australian aviation market in freight and passengers. Although a general “open skies” policy is not being considered, agreement was reached with New Zealand in late 1996 to establish a single aviation market in the two countries. The government is also to lease (for a 50-year period) major airports to private operators (with majority Australian ownership) starting in 1997/98.

• Maritime: in an effort to further liberalize the sector, Australia is to embark on a reform agenda which will include: a review of the anti-competitive provisions of the Trade Practices Act (Part X) which provides certain exemptions for shipping conferences; wind back cabotage protection (which restricts the use of foreign vessels in Australia’s coastal waters); review the requirement for majority Australian ownership for Australian registration of ships; and review technical standards and practices to ensure they are transparent, applied consistently, and are consistent with recognized international standards and practices.

• Railways: the government recently announced plans to offer Australian National and its share holding in the National Rail Corporation (which it jointly owns with the NSW and Victorian governments) to the private sector, although no date for the sale has been set.

103. The Commonwealth and states and New Zealand have recently entered into the Trans-Tasman Mutual Recognition Arrangement which aims to apply mutual recognition principles to laws relating to goods and registered occupations.

B. Trade Policy Developments

104. Since 1988, Australia has undertaken a comprehensive program of tariff reductions across the economy. Tariffs on most goods have been set at 5 percent since July 1, 1996. There are five exceptions to this:

a. Passenger motor vehicles (PMV) industry: while tariffs in this sector have been significantly reduced in recent years, they remain well above the general tariff level. The scheduled phase down of tariffs will see a progressive reduction of 2½ percentage points per year to 15 percent by 2000. There is no announced policy beyond this date, although a draft review of the industry by the Productivity Commission has recently been completed, and is currently being considered by the government.

b. Textiles, clothing, and footwear (TCF) industries: the scheduled phase down of tariffs will see an across-the-board reduction to 25 percent, 15 percent, and 10 percent respectively for these industries by 2000. Post-2000 assistance arrangements have yet to be announced. A Productivity Commission review of these industries is currently under way.

c. Sugar: the tariff is set at $A 55 per tonne until 30 June 1997. A recent review recommended the abolition of the tariff, but the continuation of the current marketing monopoly for domestic and export sales.

d. Dairy: as a result of the Uruguay Round, from 1 January 1995, a tariff of $A 96 per tonne was imposed on certain cheese imports up to a total of 11,500 tonnes, with imports above that level attracting a tariff of $A 1,440 per tonne. In 1996, the latter (out of quota) tariff was reduced to $A 1,366 per tonne. Imports from New Zealand and the South Pacific Forum Island Countries45 are exempt from the quota. The rate of duty on the first 11,500 tonnes imported will remain unchanged to the year 2000, but the duty to be applied to imports above this level will be reduced progressively by 15 percent between 1995–2000.

e. Vegetables: as part of a four-year reduction plan, tariff rates for certain vegetables (including dried potatoes, canned tomatoes, and tomato paste) are scheduled to be phased down from their current level of 8 percent to 5 percent on January 1, 1998.

105. The number of new anti-dumping cases initiated in 1994/95 and 1995/96 (6 and 11, respectively) was substantially lower than in any year during the 1980s and early 1990s. However, 101 anti-dumping and countervailing measures were in place in 1995/96 compared to 75 in 1992/93.

1

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

2

Fiscal year growth has averaged 3¼ percent per annum.

3

See, for example, Economic Planning Advisory Council, Tariff Reform and Economic Growth, Melbourne, February 1996.

4

See IMF, Australia—Selected Issues (SM/96/62, 3/14/96).

5

While growth in 1995/96 averaged 4¼ percent, by September 1996, the year-on-year rate of growth had slowed to 3¾ percent

6

See IMF, Australia—Selected Issues (SM/96/62, 3/14/96).

7

Measured by average weekly ordinary full-time earnings (AWOTE).

8

The decline in household saving has made it an almost negligible source of funds, contributing less than 10 percent to domestic finance of gross accumulation in the past two years (Table 4).

9

The Treasury underlying CPI is derived by excluding items from the CPI basket on the basis that changes in their prices are highly volatile; exhibit marked seasonal patterns; or are largely affected by policy decisions. The items excluded are as follows: meat and seafood, fresh fruit and vegetables, clothing, government-owned dwelling rents, mortgage interest charges, consumer credit charges, local government rates and charges, household fuel and light, automotive fuel, postal and telephone services, urban transportation fares, tobacco and alcohol, health services, pharmaceuticals, holiday travel and accommodation, and education and child care. It retains a little over 50 percent of the CPI.

10

As the Reserve Bank raised the official cash overnight interest rate by 275 basis points in three steps.

11

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

12

In a statement released in January 1997, the Australian Bureau of Statistics (ABS) indicated that actual employment growth during the second half of 1996 may have been higher than estimated by its surveys. This is because in August 1996 the ABS switched from face-to-face interviews to less costly telephone interviews, and the latter are believed to make it easier for people to claim they are unemployed. The ABS estimates that cumulative job creation from August through December 1996 may have been 30,000–45,000 jobs higher than originally estimated.

13

Measured by the change in AWOTE, net of the change in the CPI. Real unit labor costs also declined in the expansion of the 1980s, whereas they remained practically unchanged during the present expansion.

14

Reaching an agreement to contain real wages after the 1981/82 recession through the Accord was, however, facilitated by the boom in real wages in the years leading to the recession.

15

For example, from September 1995 to September 1996, the average manufacturing export price index has declined by 5 percent.

16

Recent developments and issues in the labor market is the subject of one of the background papers.

17

AWAs will replace the Enterprise Flexibility Agreements (EFAs) introduced in the IRRA. These proved unsuccessful (only 104 agreements were made) because they were complicated to implement, many small businesses were excluded, and unions could become involved in agreements even in nonunion workplaces.

18

In the remainder of the paper, the state, territory, and local government sector is simply referred to as the state government sector.

19

The fiscal year runs from July 1 to June 30. The underlying budget position excludes the impact of net advances. Net advances consist of net policy lending and net equity transactions.

20

In headline terms, the public sector budget position improved from a deficit of 4¾ percent of GDP in 1991/92 to a surplus of 1¼ percent of GDP in 1995/96.

21

In the 1980s, the Commonwealth underlying budget balance moved from a small surplus in 1981/82 to a deficit of 3½ percent of GDP in 1983/84, before returning to surplus in 1987/88. In the 1990s, the budget has moved from broad balance in 1990/91 to a deficit of 4¼ percent of GDP in 1992/93, and remained in a deficit of 2 percent of GDP in 1995/96.

22

Projections from the ABS, Government Financial Estimates, based on the Commonwealth and state budgets for 1996/97.

23

A fuller discussion of the institutional reforms to fiscal policy is provided in the background paper on Selected Issues for the Article IV consultation.

24

The headline deficit improved from 3½ percent of GDP to 1 percent of GDP between 1992/93 and 1995/96.

25

This involved companies increasing 1994/95 taxable income at the expense of 1995/96 income by bringing forward net income to take advantage of the lower rate applying for 1994/95 (taxes are paid on the previous year’s income).

26

Despite the increase over the past four years, revenues still remain below the levels recorded in the late 1980s. While direct tax revenue has now recovered to its previous level, indirect tax collections and nontax revenue remain below those levels. This is due to lower revenue from import duties due to the reduction in tariffs and lower interest receipts from the state governments and PTEs due to a change in financing arrangements 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.

27

The measures introduced in the 1996/97 budget are worth about $A 7.2 billion (or 1¼ percent of GDP) during 1996/97–1997/98.

28

The health insurance incentives consist of income-tested rebates to help defray the cost of private insurance. The family tax initiative provides tax relief for low- and middle-income families with children through an increase in the income tax free threshold. Cash assistance will be available as an alternative for low-income families. Both initiatives will be delivered partly through outlays and partly through revenues.

29

In the 1996/97 Commonwealth budget papers, the cost of tax expenditures in 1995/96 were estimated at $A 17 billion (13½ percent of budget outlays), of which one-third related to superannuation. The National Commission of Audit (NCA) noted that tax expenditures created a number of problems, particularly since they are less visible than outlays and therefore are less likely to be critically assessed and reviewed. They are also generally uncapped, open-ended, and susceptible to cost overruns. The NCA therefore recommended that the government comprehensively review all tax expenditure programs.

30

This decline reflects the end in the early 1980s of the major expansion of electricity generating capacity by the states as well as the impact of recent privatizations.

31

The objective is defined as such to allow for natural short-run variations in underlying inflation over the cycle while preserving a benchmark for performance over time. It is defined in terms of underlying inflation, which excludes mortgage interest and consumer credit charges, automotive fuel, and other volatile items from the headline CPI. The time frame over which underlying inflation is to be measured and the acceptable extent and duration of deviations from the target range of 2–3 percent are not precisely defined. A fuller discussion of the monetary policy framework can be found in the background paper on Selected Issues for the Article IV consultation.

32

“Statement on the Conduct of Monetary Policy,” August 14, 1996, published in the September 1996 Reserve Bank of Australia Bulletin.

33

Defined as the annual yield on 10-year Commonwealth government bonds less the 12-month ended change in underlying inflation.

34

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

35

Deposits of banks with the Reserve Bank increased since July 1996 due to the discontinuation of earlier arrangements in the overnight cash market in preparation for the introduction of a real-time gross payments settlement system. Previously, banks held funds with the authorized money market dealers to cover balances in the cash market. Since July 1996, the Reserve Bank has been paying interest on bank deposits which has encouraged banks to hold deposits with the Reserve Bank.

36

Including both portfolio and direct investment borrowing.

37

Which comprises the sum of net external debt and net external equity.

38

The Commonwealth government in recent years has not issued foreign currency-denominated debt directly in offshore markets.

39

The principal elements of the national competition policy package were detailed in Australia—Recent Economic Developments (SM/96/59, 3/8/96), pp. 31–33.

40

This agreement was based on the recommendations of the 1993 Hilmer Report. See F. Hilmer, (The Independent Committee of Inquiry) 1993, National Competition Policy.

41

Industry Commission, 1995, The Growth and Revenue Implications of Hilmer and Related Reforms: A Report by the Industry Commission to the Council of Australian Governments.

42

See Government Trading Enterprise Performance Indicators: 1990/91 to 1994/95, Steering Committee on National Performance Monitoring of Government Trading Enterprises, June 1996.

43

A triopoly was introduced in the market for mobile telephones.

44

Currently, there is a government-owned carrier (Telstra), a second general carrier (Optus), and a third mobile carrier (Vodafone). Optus and Vodafone are required to have effective Australian control and the maximum possible Australian ownership.

45

The South Pacific Forum Island Countries consist of Fiji, Papua New Guinea, Western Samoa, Kiribati, Solomon Islands, Tuvalu, Federated States of Micronesia, Tonga, the Cook Islands, Nauru, Niue, the Republic of the Marshall Islands, Vanuatu, and Palau.

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Cover IMF Staff Country Reports
Australia: Recent Economic Developments
Author:
International Monetary Fund
Volume/Issue:
Volume 1997: Issue 022
Publisher:
International Monetary Fund
ISBN:
9781451801941
ISSN:
1934-7685
Pages:
95
DOI:
https://doi.org/10.5089/9781451801941.002
  • CHART 1
    View in gallery
    CHART 1

    AUSTRALIA: RECOVERIES, 1983/84–1996/97 1/

    (Trough=100)

  • CHART 2
    View in gallery
    CHART 2

    AUSTRALIA: REAL OUTPUT, 1986/87–1996/97

  • CHART 3
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    CHART 3

    AUSTRALIA: COMPANY PROFITS AND BUSINESS INVESTMENT, 1986/87–1996/97

    (Annual percent change)

  • CHART 4
    View in gallery
    CHART 4

    AUSTRALIA: PRICES, 1986/87–1996/97

    (Annual percent change)

  • CHART 5
    View in gallery
    CHART 5

    AUSTRALIA: EMPLOYMENT AND UNEMPLOYMENT, 1986/87–1996/97

  • CHART 6
    View in gallery
    CHART 6

    AUSTRALIA: EARNINGS AND COSTS, 1986/87–1996/97

    (Annual percent change)

  • CHART 7
    View in gallery
    CHART 7

    AUSTRALIA: PUBLIC SECTOR FINANCES, 1991/92–1996/97

    (In percent of GDP)

  • CHART 8
    View in gallery
    CHART 8

    AUSTRALIA: COMMONWEALTH REVENUES, 1986/87–1996/971/

    (In percent of GDP)

  • CHART 9
    View in gallery
    CHART 9

    AUSTRALIA: COMMONWEALTH EXPENDITURES, 1986/87–1996/97 1/

    (In percent of GDP)

  • CHART 10
    View in gallery
    CHART 10

    AUSTRALIA: STATE GENERAL GOVERNMENT FINANCES, 1991/92–1996/971/

    (In percent of GDP)

  • CHART 11
    View in gallery
    CHART 11

    AUSTRALIA: PUBLIC TRADING ENTERPRISES’ OPERATIONS, 1991/92–1996/971/

    (In percent of GDP)

  • CHART 12
    View in gallery
    CHART 12

    AUSTRALIA: INTEREST RATES, 1986/87–1996/97

    (In percent)

  • CHART 13
    View in gallery
    CHART 13

    AUSTRALIA: INTEREST RATE SPREADS, 1986/87–1996/97

    (In percent)

  • CHART 14
    View in gallery
    CHART 14

    AUSTRALIA: MONEY AND CREDIT AGGREGATES, 1986/87–1996/97

    (Annual percent change)

  • CHART 15
    View in gallery
    CHART 15

    AUSTRALIA: EXTERNAL CURRENT ACCOUNT, 1986/87–1996/97

    (In percent of GDP)

  • CHART 16
    View in gallery
    CHART 16

    AUSTRALIA: IMPORT VOLUME DEVELOPMENTS, 1986/87–1996/97

  • CHART 17
    View in gallery
    CHART 17

    AUSTRALIA: EXPORT VOLUME DEVELOPMENTS, 1986/87–1996/97

  • CHART 18
    View in gallery
    CHART 18

    AUSTRALIA: INVESTMENT INCOME, 1986/87–1995/96

    (In percent of GDP)

  • CHART 19
    View in gallery
    CHART 19

    AUSTRALIA: CAPITAL FLOWS, 1986/87–1995/96

    (In percent of GOP)

  • CHART 20
    View in gallery
    CHART 20

    AUSTRALIA: NONOFFICIAL CAPITAL INFLOWS, 1986/87–1995/96

    (In percent of GDP)

  • CHART 21
    View in gallery
    CHART 21

    AUSTRALIA: NONOFFICIAL CAPITAL OUTFLOWS, 1986/87–1995/96

    (In percent of GDP)

  • CHART 22
    View in gallery
    CHART 22

    AUSTRALIA: EXTERNAL LIABILITIES, 1980/81–1995/96

    (In percent of GDP)

  • CHART 23
    View in gallery
    CHART 23

    AUSTRALIA: GROSS EXTERNAL DEBT, 1980/81–1995/96

    (In percent of GOP)

  • CHART 24
    View in gallery
    CHART 24

    AUSTRALIA: COMPOSITION AND MATURITY OF EXTERNAL DEBT

    (In percent of total debt outstanding)

  • CHART 25
    View in gallery
    CHART 25

    AUSTRALIA: EXCHANGE RATE AND TERMS OF TRADE, 1986/87–1996/97

CHART 1

AUSTRALIA: RECOVERIES, 1983/84–1996/97 1/

(Trough=100)
CHART 2

AUSTRALIA: REAL OUTPUT, 1986/87–1996/97
CHART 3

AUSTRALIA: COMPANY PROFITS AND BUSINESS INVESTMENT, 1986/87–1996/97

(Annual percent change)
CHART 4

AUSTRALIA: PRICES, 1986/87–1996/97

(Annual percent change)
CHART 5

AUSTRALIA: EMPLOYMENT AND UNEMPLOYMENT, 1986/87–1996/97
CHART 6

AUSTRALIA: EARNINGS AND COSTS, 1986/87–1996/97

(Annual percent change)
CHART 7

AUSTRALIA: PUBLIC SECTOR FINANCES, 1991/92–1996/97

(In percent of GDP)
CHART 8

AUSTRALIA: COMMONWEALTH REVENUES, 1986/87–1996/971/

(In percent of GDP)
CHART 9

AUSTRALIA: COMMONWEALTH EXPENDITURES, 1986/87–1996/97 1/

(In percent of GDP)
CHART 10

AUSTRALIA: STATE GENERAL GOVERNMENT FINANCES, 1991/92–1996/971/

(In percent of GDP)
CHART 11

AUSTRALIA: PUBLIC TRADING ENTERPRISES’ OPERATIONS, 1991/92–1996/971/

(In percent of GDP)
CHART 12

AUSTRALIA: INTEREST RATES, 1986/87–1996/97

(In percent)
CHART 13

AUSTRALIA: INTEREST RATE SPREADS, 1986/87–1996/97

(In percent)
CHART 14

AUSTRALIA: MONEY AND CREDIT AGGREGATES, 1986/87–1996/97

(Annual percent change)
CHART 15

AUSTRALIA: EXTERNAL CURRENT ACCOUNT, 1986/87–1996/97

(In percent of GDP)
CHART 16

AUSTRALIA: IMPORT VOLUME DEVELOPMENTS, 1986/87–1996/97
CHART 17

AUSTRALIA: EXPORT VOLUME DEVELOPMENTS, 1986/87–1996/97
CHART 18

AUSTRALIA: INVESTMENT INCOME, 1986/87–1995/96

(In percent of GDP)
CHART 19

AUSTRALIA: CAPITAL FLOWS, 1986/87–1995/96

(In percent of GOP)
CHART 20

AUSTRALIA: NONOFFICIAL CAPITAL INFLOWS, 1986/87–1995/96

(In percent of GDP)
CHART 21

AUSTRALIA: NONOFFICIAL CAPITAL OUTFLOWS, 1986/87–1995/96

(In percent of GDP)
CHART 22

AUSTRALIA: EXTERNAL LIABILITIES, 1980/81–1995/96

(In percent of GDP)
CHART 23

AUSTRALIA: GROSS EXTERNAL DEBT, 1980/81–1995/96

(In percent of GOP)
CHART 24

AUSTRALIA: COMPOSITION AND MATURITY OF EXTERNAL DEBT

(In percent of total debt outstanding)
CHART 25

AUSTRALIA: EXCHANGE RATE AND TERMS OF TRADE, 1986/87–1996/97