Reserve Bank of Australia Annual Report – 1966 Introduction

1965/66 marked the Australian changeover from £.s.d. to a decimal currency system based on a dollar unit equivalent to ten shillings, divided into 100 cents.

From the economic viewpoint, the year was characterised by changes in the pace and pattern of expenditure on a scale which could well have been so unsettling in its impact as to lead to widespread structural problems. Uncertainties there were in plenty — and, at times, anxieties — about the likely course of events. Looking back over the year as a whole, however, it must be concluded that the economy has come through a testing period in reasonably good order.

As we entered 1965/66, signs of strain were still in evidence. Aggregate expenditure was continuing to rise at a rapid rate, labour markets were still under strong pressure and imports were rising much faster than exports. There were indications that slower rates of increase in at least some categories of private expenditure might be in prospect but, although our international reserves were still at an historically high level, the desirability of achieving an early improvement in the trend of our international payments was increasing. At the same time it was clear that a further substantial lift in governmental expenditures was in prospect to provide for defence and other commitments. If this was to be accommodated without adding to internal and external pressures, a moderation of the rate of increase of private expenditure would be necessary.

In part, moderation came from natural causes. Severe drought in New South Wales and Queensland brought a drop of the order of $300 million in farm incomes and rural investment fell off quite markedly. Dampened also by increased taxes, generally slower increases in employment and earnings and more restrained recourse to instalment credit, aggregate consumption expenditure showed only a modest rise. However, with governmental expenditures and non-rural private capital expenditures continuing to rise strongly, the economy was, for most of the year, close to a position of balance internally and moving closer to external balance.

Financially, early prospects had suggested that conditions were likely to tighten further, perhaps to an extent which would call for a general easing of monetary restraints to avoid an over-severe check to expenditures. Reasons why this did not develop are mainly to be found in the unprecedented buoyancy of private capital inflow and, to a lesser extent, the greater-than-expected excess of expenditures over receipts of public authorities. In this setting, no further monetary policy moves of major significance were necessary and such action as was taken consisted mainly of measures designed to dampen fluctuations which could possibly have disturbed the delicate balance of the economy.

As the year closed, indications were for a continued modest rate of increase in aggregate private expenditure, along with further changes in its composition. Externally, although some loss of reserves looked possible during 1966/67, it seemed unlikely to be on such a scale as to cause concern. Given a further strong rise in governmental expenditures, maintenance of a generally balanced position in domestic markets seemed reasonably assured. The medium term outlook was bright, although that for the period immediately ahead was a little clouded by uncertainties about seasonal conditions and prospects of sustaining the high level of private capital expenditure.

In 1965/66, with rural investment cut by drought, investment in non-rural industry, influenced to a substantial extent by capital inflow from abroad, had been a more than usually important contributing factor in the overall rise in private capital expenditure. Although Australia appears to offer relatively attractive growth prospects for overseas investors, the chances of our continuing to attract overseas capital on the scale of 1965/66 in the period immediately ahead will depend also on trends in world trade patterns and financial prospects in national and international capital markets.

The rate of expansion of world trade slackened appreciably during 1964/65 but showed a partial recovery in the first half of 1965/66. This recovery was influenced by a resurgence of import demand in industrial countries which, if continued, offers improved prospects for the growth of exports of primary-producing countries generally. However, interest rates in the main industrial economies of the world have recently been rising. With the United States and United Kingdom making strenuous efforts to check the drain on their reserves, international borrowers have turned increasingly to European sources of finance. As a consequence, the international financial markets of Europe have been subject to considerable strain, and both short and long term interest rates in these markets, as well as in the United States and the United Kingdom, are now at high levels.

Against this background, if Australia is to maintain and increase its momentum of growth, it may well be forced, at least for a time, to greater reliance upon its own savings to provide capital for development. Though this would ensure a greater Australian share in the fruits of development, it would pose a tremendous challenge.

A good deal of progress has already been made in the adaptation of the Australian financial framework to meet the developing needs of the Australian economy in all its aspects. Room for further improvement remains, particularly in the mobilisation of funds for the finance of large developmental projects. However, financial resources alone do not ensure a rapid rate of development. An efficient capital market is concerned more with the allocation of resources than with increasing their total. An expanding work force and rising stock of capital equipment, together with improved technical skills and a capacity to develop new processes and new and improved products, are vital elements in rapid growth. In this latter area we can undoubtedly benefit greatly from partnership with others, particularly those in more technically-advanced countries. Considerable importance must also be accorded to relations with less-developed and less-affluent nations, and to international co-operation to assist their progress.