Reserve Bank of Australia Annual Report – 1976 The Year in Brief

Major economic imbalances, a legacy from the recent past, existed in Australia as 1975/6 began; the main task of policy during the year was to begin correcting these. Many measures of economic performance, such as aggregate spending, industrial production and employment, suggest that 1975/6 was, as a year, little better than its predecessor. There were, however, distinct changes within the year; private spending and aggregate output were rising in the second half of 1975/6; the rate of growth of wages and prices had moderated; and, after falling since the end of 1973/4, total employment had apparently begun to rise again. Although, partly because of the contribution of stockbuilding to the spending growth, the recovery remains at risk, the tentative indications of returning economic health provide some hope of taking part during 1976/7 in the world economic recovery.

The Australian economy has been tightened and strengthened since the unprecedented developments of 1974. In the twelve months to December 1974, average weekly earnings rose by 28 per cent, consumer prices by 16 per cent, and so real wages by some 10 per cent – cramming into twelve months the normal trend growth of real wages accruing in about three years; and this in a year in which average productivity fell as output contracted. Commonwealth Government outlays were expanded (46 per cent on the previous year) and tax rates reduced, so that in the last quarter of 1974/5 the deficit (tax harvest and other seasonal influences apart) was running at an annual rate of nearly $5 billion. Business profits fell away very sharply in the course of 1974, and the number of registered unemployed trebled in the second half of the year. The story of economic management in 1975/6, by the Commonwealth Government and by the Reserve Bank, is essentially the story of measures to redress imbalances and to return the Australian economic framework to a condition from which it could resume normal growth and development.

In August the Commonwealth Budget set out to hold the deficit for 1975/6 to $2.8 billion. Expenditure plans were cut and, with little cost to total revenue, marginal tax rates for the bulk of taxpayers were reduced to 35 per cent, so that the influence in wage negotiations of the “tax bite” would be diminished. In the event, the deficit exceeded the Budget estimate by $0.8 billion, largely because – helpfully to the economy – money wage rates rose in 1975/6 by less than had been assumed in the Budget estimate of PAYE receipts.

On taking office the new Commonwealth Government initiated further expenditure cuts and in May the Treasurer predicted a reduction in the deficit for 1976/7 in spite of the full indexation of personal income tax to offset the rise in consumer prices in the year to the March quarter of 1976. Superimposed on the restraint in expenditure in 1975/6, the new proposals moved public expenditure towards austerity. They pointed towards little if any growth in the Commonwealth's real outlays on goods and services in 1976/7, and, taking account also of the arrangements made with State Premiers in June, only low growth in the absorption of real resources by the entire public sector.

The most notable feature of the balance of payments in 1975/6 was a sharp capital outflow during December; but following a statement from the Treasurer that devaluation was not part of the new Government's policy, the outflow ceased and there were modest increases in reserves over the following two months. For the year as a whole there was a current account deficit of about $850 million. Taking into account capital movements, the external accounts overall were in substantial deficit in the first half of the year, but close to balance in the second half. Reserves fell over the year by some $900 million.

The Reserve Bank's policy in 1975/6 sought to achieve monetary conditions which would not give scope for a resurgence of inflation, but which would provide means for sustainable recovery from the recession of 1974. From early 1975, trading banks were observing lending objectives which provided for a smooth but limited flow of finance for viable enterprises; the Statutory Reserve Deposit ratio was raised substantially during the second half of 1975. In the December quarter, there was a pause in policy actions as political events for a while supervened. In the event, liquidity and the volume of money grew strongly in the half year to December.

1 Selected Indicators

The third quarter of 1975/6 saw a pattern of financial actions by the Bank and by the Government which turned around the liquidity of the banking system and of the community from a situation of too much ease to one of much more firmness. A new security, the Australian Savings Bond, was introduced in January to finance more of the government deficit by drawing directly on the very high savings of the household sector; large amounts of the new security were taken up by the public. The minimum LGS ratio of the major trading banks was increased temporarily from 18 to 23 per cent of deposits, the higher ratio to continue to March 1977. At the same time the maximum interest rate of “smaller” bank loans was reduced; businesses also benefited from the introduction of investment allowances and the suspension of quarterly income tax collections from companies. Following the measures of restraint, tighter conditions emerged in some financial markets and the availability of funds to some financial intermediaries was reduced.

These measures had the intention and the effect of making the public's liquidity tighter and the banking system's “free” reserves much lower. To cope with the sharp seasonal rundown in liquidity in the June quarter, the Bank undertook substantial ameliorating action, involving the temporary outflow of funds to the public. The Statutory Reserve Deposit ratio was reduced, and in addition to its usual large seasonal purchases of government securities, the Bank considerably expanded for a time its buying operations in commercial bills.

These actions were a response to the exigencies of a seasonal rundown sharper than had been expected. Without them, the unusually heavy concentration of tax payments would clearly have tightened finance too sharply, impeding the conduct of business and the progress of the nascent recovery in activity. The Reserve Bank's underlying policy stance remains one of firm restraint; the easing actions were seen as temporary and were for the most part inherently self-reversing in nature.

2 Selected Indicators

By the end of the year there were signs of improvement in some areas of the economy. Although still high, the growth of wages and prices had moderated. Thanks largely to a fall in food prices, the increase in the consumer price index for the June quarter was, if the impact of the introduction of Medibank on the September quarter index is excluded, the smallest rise for over two years. The wage indexation decision at the end of May placed a “plateau” to the amount of wage increase arising from the increase in prices in the March quarter. Private spending, though still uneven across sectors, appeared to be strengthening. Business investment in plant and equipment, aided by the additional government incentives introduced in January, was increasing: investment in new dwellings was at a substantially increased level, and there were some signs of an increase in private consumption expenditure. As generally occurs in the early stages of an upswing, the rise in spending was slow to reflect in a reduction in unemployment, but private employment appeared to have begun rising again.

A firm continuation of the thrust of policy against inflation continues to be necessary to sustain the tentatively emerging indications of economic improvement. For the community to countenance the persistence of inflation would be to hinder the growth of economic activity and prejudice national living standards.