, ;1' No. E-178 ?i "q/:JNFIDENTlAL , '7 " l!' "" ~r...!, ~_ 'f .... ...: k ! .. J ON ------,--4 j 67100 I This report is restricted to those memberso.f : the staff to whose work it directly relates. INTERNATIONAL BANK FOR RECONSTRUCl'ION ..AND DEVELOPMENT RECENT ECONOMIC DEVELOPMENTS IN AUSTRALIA August 24, ,1951 Economic Department J. H. Collier AUSTRALIA Basic statistics ~: 2,974 .581 square miles Population: 8.0 million (estimated) Currency: Australian Pound = Exchange Rate - A.~ 1 US$2.24 (Par value) = US$ 1 A.~ 0.45 (9 shillings) A.~ 1 million US$2,240,OOO = Trade Statistics Equiv. tp Equiv. to A.~ rn. US$ m. A.~ m. US$ m. Exports 604 1,4.5.5 981 2,20:> Imports .536 1.305 742 1,661 f68 f IS0 f 239 f 539 Balance of Paxments Current Balance 1949-.50 A.~ - 35 million 19.50-51 A.~ f 100 million (estimate) Price Index~s (1937 =100) June 1250 H& lqSl ':vholesale Prices 222 271 E...~ort Prices 396 76 7Y 627 ?J jj Iv!arch. Y April. Nationa.l Income (1949-50) A.~2,220 million, or $4.95 billion ($620 per capita) Foreign Assets of the CommoIl1,real th :Bank June 195:' .- A,1; 584 ($1,310 million) May J.93)· .• A,±, 789 ($1,770 million) REC~T ECONm1IC • DEVElOPHENTS, .. AUSTP.A1IA INla.. " , ',' p r Since 1946-47, the Australian economy has been ~ubject to continued inflationary pressure and in the recent fiscal year. ending June 30, 1951, the uJ)"rard movement of prices and wages has quickened. The inflation springs primarily from the high level of investment brought about by the attempt to ov~rcome the arrears of capital formation and maintenance resulting from the ~.rar and at the sa-"l'le time to absorb a large volume of immigrants. The nropor- Hon of the national income devoted to investment has risen from l3.6~ in 1946~47 to 20;; in 1949-50. The cost of living index has been rising by a~out 10% per year and. since. in each State, there is a basic minimum ,.rage ",hich is ad,justed every quarter to changes in the cost of living index, this has con- tributed to an automatic 1,rage-pri~e spiral. The maintenance of high investment has been facilitated by easy mone- tary and credit cond! tions. During the "rar there ','as a 130t increase in the money supply against a 64% increase in the national income so that in 1946 the economy was in a very liqUid condition. Since then. the national income has i~creased faster than the money supply but nevertheless bank lending and an inf10~fr of foreign funds have combined to produce a situation ~"here invest- ment demands could be easily financed. The 1nflo1.r of external cani tal, mainly sterling, became important in 1948-49 and has been a substantial expansionary force. Although this movement has provided foreign excha.nge ',rhich might have been utilized to finance imports in order to offset some of the inflationary forces, this did not prove possible o\·ring to the limited availability of goods against payment in sterling. Thus, in effect, the flO,!!r of capital to Australia has been a flo1.<1 of money only, unaccompanied by a flo~·r of real resources. Credit and monetary controls in Australia have not been sufficient to prevent the expenditure of this money '~'i thin the cO\l..Tl.try. The Special Account system, by 'I,hich the Common"'ealth Bank is empo,·rered to require check-paying banks to hold part of their assets in ~ecial accounts "tThich are not available as cash reserves. enables any Rscondary credi t expa..11.sion as a result of central bank borro,·ring or inflo,·r of over- seas capital to be prevented. But it does not prevent the expenditure of the original increase in deposits. To sterilize the inflo~,' of capital, it ','ould have been nece~~ary to pursue an offsetting contractionary cred! t policy. In the period July 1950-June 1951, the inflation has been accentuated by the surplus on the current balance of payments of up~·'a:rds of A.;UOO mil- lion (;:;223 million eouivalent). 'i'his has corne aboll.t entirely as a result of the rise in the price of Noo1. :';001 prices rose rapidly bet'·,een September 1950 and Harch 1951, For the eight-month period ending in February 1951, average prices vrere 140~~ above those paid in the year 1949-50. There .,ras a further rise in Earch but at the end of Farch the market broke and prices fell by 40» 01' WClre. But a large part of the Australian clip "'as diSposed of during the nigh price period ,·rith the result that the tot.al proceeds from 1"001 e:;rp0ns amounted to A.;b635 million (Sl,42D million eauivalent) as compared to A.;b31J million ($700 million equivalent) the previous year, The fact that the increased incomes from the balance of payments surplus are concentrated on one section of' the population - the 1<1001 groNers - means that a larger proportion is likely to be saved than ','ould have been the Case had the increase been sp~ead more evenly throughout the economy. The Government also introduced a special "1lo01 Contribution by ~"hich "rool gro~rers ,·rill p~ 20% of' the proceeds of 111001 sales to the Revenue Department as an advance payment against income tax liabilities. ':':::'e1' "rill thus be paying tax on tlltO years income at the same time. The ~;ool Contribution scheme "'as expected to bring in A.3;,lOJ million, but it should be noted that a measure such as this is apt to be a palliative rather tl~ a cure for the inflationary disease, since the ~repayment of' taxes does not in the long run reduce the level of money incomes. In any c~se, there have been clear indications of an intensification of inflation during the past year. The ',!holesale price index rose by about 15~ per year from June 19-+7 to June 1950 but in the eleven months from June 1950 to I,lay 1951 it rose by 22). Retail prices, ,.rhich had been rising by l~ per year, increat'led by 115(, from the second quarter of 1950 to the first quarter of 1951. The average Neekly basic "'age has increased from A.I:. 6".15 ($15 equivalent) in June 1950 to A.= 9 •• 9 ($21 eqUivalent) in August 1951. The Goverl"_"nent is now about to make a rene,·red attempt to counter the inflation. There has been a meeting of the Loan Council, a Federal body Nhich revie1,.rs all Government and semi-government borroN'lng, to con... ~ider the operation of central bank credit, control of installment credit and a drastic cut in the scale of Common"'eal th public l'Tork~. The Prime Hinister has announcecl that the Government 1"ould budget for a surplus. The Government also plans to prune the Commonv'eal th public service by up to 10,000 employees from the present total of perhaps 190,000. Finally, the rate of immigration is to be reduced, a measure 1"hich goes to one of the most important aources of high investment 1emand. It had been honed to maintain immigration at the rate of 200,000 per year. Net immi,~ation in 1950 "'as 152, 000 and, it has been reported that this rate ,·,i11 be re:';uced 'by at least a quarter. The nece~sary invel'ltment to establish one permanent immigrant has been e~ti!!lated at A.I:,l,OOO, although this may not all be required immediately. As total investment in Australia ia no~·r ruxming at something li~{e A.M50 million a year. a decision to make any substantial cut in immigration 1'rould have a great effect on investment demand. This action is, of course, a retree,t from the original high ambi- tions of the Government. But in vie'IT of the (Sreat and groHing difficul- ties \,rh:i.ch inflation is causing in Australia, a decision to advance more slot}Tly on this front ma.y enable a much sounder advance to be made in the development of the economy as a 'I'hole. :hile in theory it might ha,ve been possible to proceed \"i th the former program if' the Government could exercise anti-inflationary controls forcefully enough, in practice it seems that this \,Tould involve a degree of self-rMtraint on the part of individuals, business a.'ld govern.ments that. in present circumstances, is beyond reasonable expectation. - 3 - The future course of the Australian inflation ,·,ill be greatly dependent on the success of the Government in obtaining cooperation from State Governments, Trade Unions and other organized groups in i te latest anti-inflationary endeavors. Although the price of "'001 has fallen from its peak, it is still much higher than i t ~.ras during the year 1949-50. Furthermore, the availability of imports is more likely to deteriorate than to improve. Any check to inflation in ,Australia must therefore come from inside the country rather than from events in the rest of the "'orId.