AUSTRALIA'S ECONOMIC RECOVERY: HAWKE'S ELECTION TRUMP CARD

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP04T00367R000302210001-5
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 8
• Document Creation Date: December 22, 2016
• Document Release Date: April 1, 2010
• Sequence Number: 1
• Publication Date: November 20, 1984
• Content Type: REPORT

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Central Intelligence Agency
Washington, D. C. 20505
DIRECTORATE OF INTELLIGENCE
Australia's Economic Recovery:
Hawke's Election Trump Card
Summary
Australia's popular Prime Minister Bob Hawke is
relying upon a resurgent economy to guarantee his
party's victory on 1 December. As the opposition
struggles to find a campaign issue, the Prime
Minister points to:
o The role of the expansionary fiscal and
monetary policies of his first budget in
spurring the recovery.
o A thus far successful wage indexation scheme.
o A new national health insurance program.
o Recent tax cuts for lower and middle income
earners as reasons to retain his economic
management.
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At the same time, Hawke is reminding business
leaders of reduced inflation, lower interest rates,
extended deadlines for tax deductions on business
investments, and the deregulation of the banking and
brokerage industries.
This memorandum was prepared by Islands Branch,
Southeast Asia Division, Office o as sian Analysis.
Information available as of 29 October was used in its
preparation. Comments are welcome and may be directed o the
Chief, Southeast Asia Division,
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The polls now show that Hawke is preferred as
the country's leader by more than 65 percent of the
population. We see no problem on the economic front
before the election, but economic challenges to
Hawke after the election will be tougher.
Australia's structural economic problems do not lend
themselves to easy solution and Hawke's own party
may impede further policy reform.
Labor's Track Record
Since the Labor Government was elected in March 1983, the
Australian economy has done well by any standard.
o Inflation has been reduced by half, with declining import
prices, to about 6 percent.
o Unemployment has fallen from a near record 11 percent to
below 9 percent.
o Real output growth this year, 5.7 percent, is the greatest
one-year improvement Australians have seen in a decade.
o Farmers have:-had a bumper crop, as the four-year drought
has ended. I
o Australia's energy and resource sector has boomed again
with economic recoveries in industrial nations, especially
the United States.
Although nonpolitical events have sparked the recovery, praise
for his government's role in stimulating and sustaining it is
One of Hawke's greatest achievements was forging a consensus
on economic policy among Australia's disparate economic interest
groups by calling an economic summit in 1983 among government,
labor, and business leaders. Proclaiming the need for slower
wage growth to improve Australia's international competitiveness,
Hawke convinced the Australian Conciliation and Arbitration
Commission, which usually leans toward labor, of the need for a
long-term wage indexation. As a result, the number of man-hours
lost to industrial disputes this year has been lower than in any
year since 1967. At the same time, real wages fell last year and
being heaped on Hawke by both business and labor.
rose only slightly in 1984, allowing company profits to surge to
Hawke and Treasurer Paul Keating have also engineered an
unprecedented deregulation of both the banking system and the
securities industry designed to encourage private business
investment. At least ten foreign banks, including one or two US
banks, will probably win Australian banking licences in the
coming year. On the domestic financial scene, Keating has
their highest level as a share or GDP since 1973.
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increased the scope of both banks and nonbanking institutions;
since their functions now overlap, a wave of mergers is under
way.
The Election Budget--Something fir Everyone
Media cynicism about,the government's attempt to please
everyone, including business, has not dampened the generally
favorable response to Hawke's 1985 budget, which was presented in
Prime Minister Hawke, left, quizzes Treasurer Keating
about anticipated budget effects.
August.* Keating boasted in his budget presentation that the
government would keep a. threefold commitment for 1984-85: to cut
the personal income tax, to reduce the deficit by more than
US$1.0 billion**, and to inc social s ending, particularly
for those in greatest need. 7s
*Hawke's 1985 budget covers the fiscal year 1 July 1984 through
30 June 1985.
**Australian dollars converted to US dollars at the prevailing
(Oct. 1984) rate of A$1.00=US$0.83.
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On the tax front, Keating delivered to the majority of
workers most of the US$9.60 per week tax cut.demanded by the
Australian Council of Trade Unions (ACTU). In line with Labor
Party principles, the cuts are directed to low and middle income
earners--traditional Labor Party voters. Business leaders,
meanwhile, are pleased with the provisions of the budget that
increase tax incentives for investment in buildings, equipment,
and oil exploration and allow the losses of one subsidiary to be
Hawke's social spending moves also are directed at some
important political constituencies. Welfare and unemployment
assistance increases aim at young people and single adults. The
dollar.amount of the welfare increment is the same for
pensioners, but they were already receiving the equivalent of
Medicare so their real benefit is less. Pensioners' complaints
are being partially offset by rent supplements for the
deducted from the profits of another for tax purposes.
neediest.
The budget's critics argue that it,is unnecessarily
expansionary, although this year's deficit will be lower than
last year's. Revenue from personal income taxes will increase
dramatically and government spending as a proportion of GDP will
rise as well. Because the increase in revenue is primarily a
result of the recovery, critics say the government should use it
to trim another US$2.1 billion from the deficit rather than to
extend social spending. Part of the problem for Hawke, however,
is that many spending items do not lend themselves to economy
moves. For example, interest payments on th national debt
consume about 10 percent of total receipts.
Prospects Look Bright Through Early 1985
Although no one expects next. year's economic performance to
outdistance that of 1984, economic growth should remain above the
growth rates familiar to Australians who weathered the final
years of Prime'Minister Malcolm Fraser. Real GDP is rising at an
annual rate of about 4 percent. For its part, the ACTU is
strictly enforcing its pact with the Hawke government by revoking
some of the privileges of the more rebellious unions. In fact,
strikes by some of the more radical unions have in recent months
Australia's external accounts, which have held up reasonably
well during the expansion, are now weakening--the one dark spot
in the overall economic picture. Exports continue apace, but are
expected to be moderated by a fall from the mid-1984 peak in
agricultural output. With consumption expenditures and capital
purchases increasing steadily, imports are expanding more than
last year, creating a small merchandise trade: deficit and
brought threats of expulsion from the ACTU.
widening the current account...deficit.
Nevertheless, the only economic issue for the opposition to
seize on thus far has been the government's post-election tax
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more people than expected seem to favor some kind of capital
gains tax to restrict the scope of tax evasion and to direct
plans. Hawke proclaims the need for tax reform, but has
exercised great care about disclosing specifics because Labor's
natural constituency opposes the most obvious reform route, a
broadly based consumption tax. Opposition Leader Andrew Peacock
warns that not only a capital gains tax but also a wealth tax and
a pensioners' assets test loom on the post-election horizon if
Labor wins. Australians, however, are inclined to believe that
Keating will block any attempt to legislate a wealth tax, and
funds into more productive investments than tax shelters.
Economic Challenges Beyond the Election
With the Prime Minister's popularity rating holding its
position above 65 percent for over a year and Peacock's rating
falling below 20 percent, Australian observers are treating a
Hawke election victory as a foregone conclusion. The only
questions are how large a majority Labor will achieve in the
House of Representatives, and how strong Hawke's right wing will
be in the party caucus.* Hawke undoubtedly"hopes to use the
election mandate he will receive-to advantage in his most
formidable challenge improving Australia's international
competitiveness and sustaining long-term growth by restructuring
the economy.
Australian analysts agree that continued high growth depends
on buoyant private investment. and wage moderation with relative
industrial peace. Although tax cuts have satisfied labor demands
for now, media reports suggest that strikes will reappear next
year if new union demands--in the form of productivity-based wage
increases or national superannuation (pension) schemes--are not
met. Increased union demands are feared partly because
inflation, wage indexation, and consequent advances into higher
tax brackets are predicted to wipe out all benefit from the
August tax cuts by mid 1985.; Answering widespread calls.-for
reform and for a broadening of the tax base, the government's
post-election tax package will surely include a capital gains tax
and probably a value-added or a sales tax covering some services
and all goods except essentials.
*The race between the parties is a bit closer than the one
between leaders and Embassy observers believe that. the new House
will have roughly the same make-up as the old: about 60 percent
Labor and 40 percent Liberal-National. Although-the left wing of
Hawke's party mounted a strong campaign to secure more seats for
its sympathizers, the Embassy believes that Hawke's
countermeasures were.at least partially successful and that his
faction will again hold about.a third of Labor's seats. Hawke's
challenge will not be keeping-right-wing votes but maintaining
the suonort of Labor's center left, Bill Hayden's faction.
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One of the problems that threatens to confound Hawke's
efforts is slow private business investment, which remains weaker
than expec*.ed--in spite of higher company profits, higher
retained cash flow, budget incentives to private business
investment, and government deregulation of the banking and
stockbroking industries. Industry leaders stress that capital"
expenditure decisions are based on need rather than on capacity
to pay and claim that the rate of return to investment remains
below that of the 1960s and 1970s. They suggest that the bulk of
the recovery in the nonfarm sector comes from cutting costs,
including laying off workers and closing factories.
Much of the economic outlook rests on Hawke's ability to
maintain the prices and incomes accord. Business seems incapable
of uniting on policy, so few observers expect successful
opposition to a national superannuation scheme (pension plan),
the top priority on the ACTU',s list of demands for the next wage
negotiation phase. Labor costs are thus expected to rise even if
wage indexation remains intact. If so. business investment will'
probably continue to lag.
Also on the negative side, the unemployment rate is unlikely
to be lowered much further soon. Optimistic reports announce
that, because of increased labor force participation and natural
labor force growth, recorded unemployment will not fall unless
3.5 percent per year GDP growth is sustained for several years.
Pessimistic reports, such as one by Bill Kelty, secretary of the
ACTU, advance the figure to 5.0 percent. In view of structural
problems in the Australian economy and the tenuous nature of the
prices and incomes accord' such._an extended period of high growth
seems unlikely.
On the other hand, inflation is unlikely to return to its
former high levels if wage pressures can be stemmed. Floating
exchange rates, instituted in December 1983, allow Canberra to
control more closely, the money supply without worrying about a
substantial deterioration in the balance of payments. Keating,
announcing the Government's 1984-85 target for money supply (M3)
growth to be 8 to 10 Dercent, has said that monetary policy will
be neutral.
Long Term Outlook
Observers in the press predict that when the economy slows
toward the end of 1985, Hawke will lose some of his popularity,
and Australia will lose the prices and incomes accord and many of
the government's other achievements. We agree that Hawke will
not be able to enact all the reforms he has placed on his second-
term agenda, primarily because he is challenging long-standing
traditions of economic policy making. Still, slower economic
growth will probably be seen as insufficient cause to abandon
Hawke's leadership. And in our judgment, Australian economic
prospects will be fundamentally improved for his and Keating's
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Trump Card
Typescript: Australia's Economic Recovery: Hawke's Election
l--C/PES/DDI
l--C/NIC
1--NIO/EA
1--DDI
5--CPAS/IMC/CB
1-
Original--OEA/SEA/IB
1--OEA/ITM
1--Ch/OEA/SEA
1--D Ch/OEA/SEA
1--OEA/NA
l--OEA/CH
1--D/OEA
1--OFA/Research Director
1--RSB/ORES /DDI
2--OCR/ISG
1--NIC/Analytic Group
1--Executive Director
Defense:
1--LTC James Riordan
1--Bill Mayo
1--Don Berlin
1--Stewart Ring
1--Jay Sloan
1--Jim Kelly
State:
1--Bob Carroll
1--Jon Glassman
1--William Brown
1--RADM Jonathan Howe
Treasury:
1--Douglas Mulholland
Commerce:
1--Bryan Jackson
'1--Bill DesRochers
1--Stephen Hall
NSC:
1--Richard Childress
1--David Laux
1--Gaston Sigur
(7E62)
(7E62)
(7E44)
(7G07)
(7F24)
(3E63)
(1H19)
(7E47)
(7D55) through (Ex. Reg. 7E12)
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