The Bad Old Days?

Vol. 6, No. 5

The past is sometimes referred to as the "good old days".  According to Prime Minister Keating, however, "a lack of political entrepreneurship ... kept Australia in the torpor, comatose, so that post-war trade passed us by during the period of the Government of Sir Robert Menzies from 1949-1966, even though (according to Mr Keating) that Government had a significant advantage because the terms of trade were "massively in Australia's favour" (SBS Interview, 2 October).

Attached are some economic indicators comparing the roughly sixteen years of Sir Robert Menzies to the eleven-year period since Labor assumed office in 1982-83.  Careful comparison indicates some "good" and "bad" points from both periods.  However, the balance appears to be more favourable to the Menzies era, and certainly more favourable than Mr Keating is suggesting.

1. GDP grew significantly faster in the Menzies era than in the Hawke-Keating era.  However, the annual rate of growth in GDP per head was about the same.  Whichever indicator is taken, Australia in the Menzies era could hardly be said to have been in a "comatose" state.  Given technological advances, and the less unfavourable movement in the terms of trade (see below), one might have expected the economy to have performed much better in the Hawke-Keating era.

2. The structural changes in the Australian economy and society were at least as great, and arguably greater, in the Menzies era.  Australia moved from riding on the sheep's back to becoming a modern industrialised society as farm product declined from over 20 per cent of GDP in 1949-50 to less than 9 per cent in 1965-66.  By the latter year manufacturing was around one quarter of GDP and manufacturing employment was around one quarter of total employment.  (Indeed, there were more people employed in manufacturing at the end of the Menzies era than there were in 1993-94.  There was no comparable structural change in the Hawke-Keating era (manufacturing did decline but only from 18.5 per cent of GDP to about 15.2 per cent).

   Similarly, the immigration programme in the Menzies era was much greater, both absolutely and relative to the existing population, than in the Hawke-Keating era.  Again, this represented a much greater structural change to both the economy and society.

   From one perspective it is remarkable that the economy performed as well as it did in the Menzies era given the extent of the structural change.  The experience of that era certainly suggests that there is a considerable capacity to adapt to such change, perhaps greater than is commonly supposed.

3. The relative importance of international trade fell sharply in the Menzies era and rose significantly in the Hawke-Keating era, a development which appears to be the chief basis of Mr Keating's comments.  However, in assessing this development it is important to note that, contrary to Mr Keating's suggestion that the terms of trade allowed the Menzies Government to reap the benefits of the "Lucky Country", there was actually a fall of nearly 15 per cent in those terms of trade.  By contrast, the reduction in the Hawke-Keating era was only about 10 per cent (see attached graph).

   True, the fall in the terms of trade in the Menzies era was from a relatively high level, although the Korean War-induced commodity price boom really had a major impact on only one year (1950-51).  That does not detract from the fact that the economy had to adapt to what constituted a greater exogenous "shock".

4. There can be little doubt that, overall, the economy performed better in the Menzies era.  In particular, unemployment, inflation, and interest rates were kept at much lower levels.  The "recession" of 1961-62 actually produced a 1.3 per cent increase in GDP and unemployment rose to only 3.2 per cent in that year, whereas GDP fell in 1990-91 and unemployment peaked at 11.3 per cent.  The proportion of the population aged 15 and over that was employed averaged nearly 1 per cent higher in the Menzies era.  The average level of business investment was similar in both periods, though less volatile in the Menzies era.  However, the proportion of investment financed from national saving was much higher in the Menzies era, with the result that drawings on external savings (and the consequent run-up in foreign liabilities) were much lower.

5. On the external side, both eras witnessed "blow-outs" in the current account deficit and the balance of payments was a "problem" in both eras.  However, in the Menzies era the current account deficit averaged a much lower proportion of GDP (2.5 per cent compared to 4.6 per cent) and, as a consequence, the increase in net foreign liabilities in the Menzies era was significantly smaller than in the Hawke-Keating era, during which time they almost doubled as a proportion of GDP.  In most of the Menzies years the current account deficit was largely financed by private foreign direct investment in Australian industry.

6. Throughout the Menzies era, Australia remained a highly protected society, such policies then being supported by the major political parties.  However, in 1960 the Menzies Government did largely eliminate quantitative import restrictions, a decision which was highly controversial and which, in the context of the times, represented a decisive move towards opening up the economy.  The level of tariff protection against imports was subsequently maintained at a high level, or even in some cases increased, in the Menzies era, and while a progressive downward movement in effective protection occurred in the Hawke-Keating era, that latter reduction still left some highly protected sectors in 1993-94.  Moreover, in the Hawke-Keating era the Government was able to "get away with" policies causing a deterioration in competitiveness simply by letting the exchange rate depreciate.  By contrast, in the Menzies era the exchange rate was relatively stable.

7. In the Menzies era the size of government increased, as did the marginal tax rate on average incomes.  However, in 1965-66 the marginal income tax rate payable on an average income was only 27.8 per cent, much lower than the 47.4 per cent rate now applying.  In the Hawke-Keating era the marginal tax rate has increased very sharply even though the size of government has been relatively stable at a much higher level.

The claim by Prime Minister Keating that the Commonwealth has significantly reduced its outlays is misleading.  While total outlays have been reduced, all of the reduction has been in assistance to the States.  The Commonwealth's outlays for its own purposes have risen significantly as a proportion of GDP.

Some Comparisons Between Eras

	Menzies		Hawke-Keating
	1949-50	1965-66	1982-83	1993-94
Economy
GDP Growth (%)	4.2 p.a.		3.2 p.a.
GDP Per Capita Growth (%)	1.9 p.a.		1.9 p.a.
Unemployment Rate (%)	1.7	1.6	9.0	10.5
Employment Rate (%) (c)	57.0	59.0	53.8	56.2
Inflation (% p.a)	6.1	2.5	8.4	1.8
Long Term Bond Rate (%)	3.2	5.2	14.9	7.4
Housing Loan Interest Rate (%)	3.9	5.8	12.5	9.5
Private Bus. Invest. (% of GDP)	8.6	12.6	10.8	8.9
Gross National Savings (% of GDP)	23.2	24.1	17.2	16.5
External Situation
Current Account Deficit (% of GDP)	1.3	4.1	3.8	3.9
Terms of Trade (% Change)	-14.7		-10.3
Exports (as % of GDP)	24.6	14.4	14.7	19.4
Net Foreign Liabilities (% of GDP)	11.6	18.5	28.4	55.8
Exchange Rate ($US per $A)	1.12	1.11	0.94	0.73
Government
Public Sector Outlays (% of GDP)	27.2	30.6	41.1	39.2
C'wealth Outlays (% of GDP)	22.2 (b)	23.3	28.8	26.5
- Own Purpose (% of GDP)	n.a.	n.a.	17.3	19.3
- Other (% of GDP)	n.a.	n.a.	11.5	7.3
C'wealth Taxes (% of GDP)	19.1	19.5	24.1	21.8
Marginal Tax Rate (% of av. income)	7.5	27.8	30.7	47.4 (a)
Structural Change
Gross Farm Product (% of GDP)	21.1	8.7	3.1	2.8
Population Growth (%)	3.2 p.a.		1.3 p.a.
Immigration (000s)	162	92	73	30

Sources:  Australian Economic Statistics 1949-50 to 1989-90, Reserve Bank of Australia, for period 1949-50 to 1965-66.  Various ABS and/or Commonwealth Budget papers for 1982-83 to 1993-94 period.  Figures for National Savings from the FitzGerald Report, updated by Dr FitzGerald.

Notes:

^(a) Including Medicare levy.  The rate is calculated on average weekly earnings for males.

^(b) 1953-54 figure.

^(c) Percentage of population aged 15+ that is employed.

Terms of Trade, Australia, 1948-49 to 1993-94
1989-90 = 100

Source:  ABS, September Quarter 1994 National Accounts, 5206.0 and 1992/93 Annual National Accounts, 5204.0.  (Implicit price deflator for exports of goods and services divided by implicit price deflator for imports of goods and services, multiplied by 100.)