C2001/4617, Transcript of Proceedings [2002] AIRCTrans 1116 (5 April 2002)

AUSCRIPT PTY LTD
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TRANSCRIPT OF PROCEEDINGS


O/N VT03296

AUSTRALIAN INDUSTRIAL

RELATIONS COMMISSION

JUSTICE GIUDICE, President
VICE PRESIDENT ROSS
VICE PRESIDENT McINTYRE
SENIOR DEPUTY PRESIDENT WATSON
SENIOR DEPUTY PRESIDENT HARRISON
COMMISSIONER LEWIN
COMMISSIONER HOFFMAN

C2001/4617, 5719, 5720, 5721, 5722,
5803, 5810, 5830, 5833, 5834, 5843,
5844, 5845, 5846, 5847, 5849, 5929,
5933, 5934, 5935 and 6130

TIMBER AND ALLIED INDUSTRIES AWARD 1999

THE HOSPITALITY INDUSTRY - ACCOMMODATION,
HOTELS, RESORTS AND GAMING AWARD 1998

BUILDING SERVICES (VICTORIA) AWARD 1994

LAUNDRY INDUSTRY (VICTORIA) AWARD 1998

CHILD CARE INDUSTRY (AUSTRALIAN CAPITAL
TERRITORY) AWARD 1989

THE VEHICLE INDUSTRY - REPAIR SERVICES
AND RETAIL - AWARD 1983

TRANSPORT WORKERS AWARD 1998

RETAIL AND WHOLESALE INDUSTRY - SHOP
EMPLOYEES (ACT) AWARD 2000

HORSE TRAINING INDUSTRY AWARD 1998

CLERICAL AND ADMINISTRATIVE EMPLOYEES
(VICTORIAN) AWARD 1995

VICTORIAN LOCAL AUTHORITIES AWARD 2001

STORAGE SERVICES (GENERAL) AWARD 1999

GROCERY PRODUCTS MANUFACTURE -
MANUFACTURING GROCERS AWARD 1996

COMMERCIAL SALES (VICTORIA) AWARD 1999

RUBBER, PLASTIC AND CABLE MAKING
INDUSTRY AWARD 1999

THE VEHICLE INDUSTRY AWARD 1992

CLOTHING TRADES AWARD 1999

GRAPHIC ARTS (GENERAL) AWARD 2000

METAL, ENGINEERING AND ASSOCIATED
INDUSTRIES AWARD 1998 - PART I

METAL, ENGINEERING AND ASSOCIATED
INDUSTRIES AWARD 1998 - PART III

Applications under section 113 of the Act
to vary the above awards re living wage
case matters (s.108 References)

10.01 AM, THURSDAY, 4 APRIL 2002

Continued from 3.4.02

MR WATSON: Your Honour, there are some housekeeping matters I want to deal with before I return to where I was in my earlier submissions. But before I attend to those I had meant to alert the Bench yesterday to the very Queensland flavour of some of the efficacy that the Commission is experiencing, and indeed the partial Queensland flavour of the Bench and was wondering whether that might indicate any prospect of movement for next year's hearing location. At any rate I just - - -

PN857

JUSTICE GIUDICE: It might give an indication of what time we are going to adjourn tomorrow.

PN858

MR WATSON: Indeed, your Honour. Your Honour, Deputy President McIntyre - Vice President McIntyre, asked a couple of specific questions about Mr Howells. Overnight we have checked with Unions Tasmania, they say Mr Howells is definitely covered by an award. There is an enterprise agreement which covers some salaried officer classifications for that entity, but it is definitely an award. We are instructed that the unions are very keen to get an enterprise bargain, but his rates are currently covered by an award.

PN859

It is a wholly owned government business enterprise. To Unions Tasmania's knowledge there are no other public sector employees who would be in the position of Mr Howells and his cohort, that is who would be on award rates.

PN860

VICE PRESIDENT McINTYRE: It just struck me as a case where one might have expected an enterprise agreement which may have alleviated Mr Howells problem.

PN861

MR WATSON: Yes. Well, hopefully soon. Your Honour, the President, raised a question regarding evidence on international issues and minimum wages. There is a reasonably extensive reference to the discussion of the bite, that is the ratio of minimum to medium and the like and in some instances minimum to average. In the Commonwealth's original submissions at paragraphs 3.4 to 3.8, which is pages 47 to 50 of their original submission, and there is what might be described as the traditional league table with Australia's ratio compared with other countries, in table 3.1 at page 48 of those submissions.

PN862

There is also some discussion of the minimum wage bite issue in our reply submissions and in the Commonwealth reply submissions. I don't think though that is really relevant to the issues perhaps that your Honour was raising. There is one other matter in relation to that question. Last year, in our submissions, we referred the Commission to an article by Buchanan and Watson and the reference in our original submissions was paragraph 5.117.

PN863

That article commented broadly on poverty issues and to paraphrase suggested a favourable comparison of the circumstances of Australia with the US, and suggested that a reason for that might be the minimum rate structure which Australia adopts, vis a vis that which the US adopts. So I am not sure whether that may have been in your Honour's mind when your Honour asked that question.

PN864

JUSTICE GIUDICE: Yes. Thank you, Mr Watson.

PN865

MR WATSON: Your Honour asked a question about the gap between award wages and those of the rest of the community. Can I take your Honour to our - take the Bench to our written submissions. I did give an answer but there are some - in our original written submissions there are some charts which I think graphically, in both the literal and metaphorical sense of that word, illustrate the point which I attempted to make yesterday in response. Firstly, at page 32, figure 2.10 - - -

PN866

PN867

JUSTICE GIUDICE: Which chapter is that in?

PN868

MR WATSON: It is chapter 2, your Honour. We provide a time series of wages growth measured by AWOTE compared to the C10 and C14 rates. And just, if you like, focusing on a period since the 90s, since 1990, there is as the Bench will see, a starkly widening gap between C10 and C14 and AWOTE, in terms of wages growth. And that picture is confirmed by the succeeding figures 2.11 and 2.12 to which I won't take the Bench at the moment.

PN869

But then over on page 36, at 213, figure 213, there are the C14 and C10 rates as a precaution of AWOTE, and again the Bench will see looking at 1990, just concentrating on the period 1990 to date, a very significant downward trend, but with a couple of points to note. And that is that '97, '98, '99, a flattening out of that trend and then a return to declines in the last two years. And in a sense it is that figure which provides a graphical illustration most starkly of what we were submitting yesterday.

PN870

[10.04am]

PN871

That is a $25 increase as a result of this year's decision will arrest the decline, it may even slightly trend upwards for C14 or hopefully even for C10, but there will still be a very significant gap between where award wages are and where others in the community are. The final point we would make in relation to that issue is that that proposition emerges itself from the Commonwealth's appendix A page 9 where they look at full time non-managerial employee rates for award-only and collective agreements and other forms of pay setting, and the gap, the minimum gap is of the order of $60 and, I should say, leaving aside Government administration and Defence.

PN872

And in our submission, there are a couple of things which stand out about that. That gap will have widened further. The data is 2000 data and it is obviously a key part of our submission that the gap has widened since 2000. Secondly, in considering the extent to which a $25 increase will have an impact on that gap, one needs to factor in that there will be additional increases for those on other forms of pay setting in the forthcoming year.

PN873

So one cannot just say, oh, well, the gap is $60, $25 will reduce it to 35, because the gap will have already widened and those rates for enterprise agreements and the like will continue to grow. So, in our submission, as we did say yesterday, the Commission in this case has three choices in relation to the gap between award rates and wage movements for the rest of the community. It can widen that gap, keep it or close it.

PN874

We say the Commission should close the gap, but even to keep it at its current level, in our submission, means an increase that is greater than last year. Just to clarify our remarks about the nature of the safety net, a safety net is not a safety net if it is so low that it provides no protection at all. In some of the submissions opposing us, there seems to be a suggestion that to grant our increase would undermine the safety net nature of the award system because it would put it, in effect, too high.

PN875

We think when you analyse the data it is just not sustainable when you look at the gap that does now exist and when you put that in the context of the evidence in relation to the low paid. There are two other matters which arise out yesterday. Firstly, while we were finding the reference to Buchanan v Watson, we also stumbled across the reference in our submissions last year to a DWERSB Commission study by NATSEM which showed 85 per cent of income units - that is households, in effect - with one safety net adjustment recipient had an effective marginal tax rate of less than 40 per cent.

PN876

And the study concluded that suggestions that there were little benefit to most families from safety net adjustments were incorrect. The reference to that is in paragraph 5.1.1.2 of last year's ACTU original submissions. One presumes - that study was in 1998/9 study - one presumes that with the changes in the tax system in 2000 the proportion facing the relatively low effective marginal tax rate will have increased from the 85 per cent.

PN877

Obviously, one cannot be definitive, but given that there has been a reduction in income tax rates, one would expect that the proportion facing effective marginal tax rates higher than 40 per cent would reduce. The final matter is, your Honour, the President, raised the question of why adjust all award rates. We had rather perfunctorily dealt with the issue of a cap as proposed by the Commonwealth and the ACCI, but can we provide this additional detail.

PN878

Firstly, section 88B of the Act makes clear that the needs of the low paid is one factor for the Commission to consider in a range, and section 88B(2) paragraph A talks about the need to provide fair minimum standards for employees in the context of living standards generally. And that is a separate requirement to the requirement to take account of the needs of the low paid.

PN879

The Commission's existing principles commence with a definition of the safety net that includes existing wages and conditions in the relevant awards - that is, all existing wages and conditions - and we note that section 88B itself talks about a safety net of fair minimum wages and conditions. It does not suggest, as is implicit in the ACCI proposition, a minimum wage singular.

[10.15am]

PN880

So in our submissions those factors tend to the important of maintaining award rates further up. In addition we make the following points, many of which have been referred to by the Commission in the past. There is the important of maintaining career paths and classification structures. There is the contribution which all award employees, we say, have made productivity. And there is the potential negative impact on productivity of awarding a significant section of the workforce, no increase.

PN881

In this context we think the Commission need do more than review its own conclusion in the April 1999 safety net review when these arguments were first run, at paragraph 92 at page 34, when the Commission said:

PN882

Our decision to award flat money increases rather than a percentage increase -

PN883

I should go back -

PN884

We have maintained the practice of adjusting award rates at all levels despite submissions that the adjustments should only apply to employees classified at or below the C10 rate.

PN885

And the bench goes on to reject the ACTU claims for a percentage adjustment.

PN886

Our decision to award flat money increases rather than a percentage increase will provide proportionately greater assistance to the low paid. In previous cases the Commission has drawn attention to the requirement that rates prescribed in awards be fair to the importance of internal relativities between classification levels, and to the need to provide increases for employees who, although employed at the higher levels, are dependent upon safety net increases for increases in pay.

PN887

Each of these factors, on its own, favours an increase at all levels. Furthermore we do not accept the Joint Government's submission that the current legislative framework compels the conclusion that employees on higher award classification rates should generally not be eligible for award safety net increases. In all of the circumstances the approach we have adopted, both the amounts and the form of the increase, strikes the right balance between the competing equity and cost considerations which the parties have drawn to our attention in their submissions.

PN888

So in our submission on that issue, and in particular on the proposals for capping, the Commission need do no more than restate its conclusion in that decision. Those are the only preliminary matters, if the Commission pleases. Yes, sorry, I have been reminded of one other. When we looked at transcripts this morning we notice that fractions had been rendered as little boxes which made some of the transcript a bit hard to read. We understand that is in the process of being fixed but the Bench may find that a reading of the transcript is not of much assistance in its current form.

PN889

JUSTICE GIUDICE: Mr Watson, I was not taking a note at the time, but the elaboration you gave in your answer to me yesterday concerning the submissions which compare, or the tables rather which compare minimum wages with medium wages in the OECD countries, is there a part of the ACTU's reply submission which deals specifically with that?

PN890

MR WATSON: There is a part of the ACTU submission, reply submission, which deals specifically with the bite question. Not with the lead table generally, but we discuss issues relating to the bite.

PN891

JUSTICE GIUDICE: Yes, did you get the reference earlier.

PN892

MR WATSON: No, I did not, your Honour.

PN893

JUSTICE GIUDICE: Yes.

PN894

MR WATSON: I can - - -

PN895

JUSTICE GIUDICE: Well, we can turn it up then.

PN896

MR WATSON: All right, your Honour, well, we might be able to assist, in any event, later in the morning. Just to recap where we had got to on our contention that Australia's economic conditions are currently buoyant. We had looked at the last three quarters of growth, all 1 per cent or above. And we are dealing with the arguments which are put against us in relation to weakness in the outlook, or uncertainty in the outlook. And we would summarise those as essentially being international outlook, the extent of moderation in housing and consumer spending, and then two specific ones, one raised by the AIG and the other by the ACCI, the uncertainty of the underlying productivity trend and the ACCI's concern regarding interest rates.

PN897

Our primary contention is that the data just does not support the exaggerated nature of the concern which are advanced, and secondly, that the positions which are put in these proceedings, in this case by those parties, are inconsistent with their public positions. And can I take the Commission to table 5 of the ACTU reply composite exhibit.

[10.22am]

PN898

It is at page 7 of that composite exhibit. This table provides the contributions to growth to domestic broken up on percentage point contributions of the final figure of 3.7 per cent in trend terms. So we provided trend data. The seasonally adjusted number, of course, was slightly higher. Can I take the Commission first to the private dwellings line under growth fixed capital expenditure. And the Commission will see that if one looks at the last four quarters the March quarter last year involved a negative contribution. June, September and December have involved positive contributions in the order of .3, .4 and .3. Those four numbers are what contribute to the .8 in the last column of the year to figure. So .8 percentage points contributed to growth in the year to December quarter 2001.

PN899

Now, the thing to be observed about that is that those four figures still include a negative number from the March quarter of last year, and even with some moderation in current growth in private dwellings over the next period, that negative number will drop out in the next round of quarterly figures, and if there is a moderation too of the order of .2, or even down to .1, the fact is that the overall contribution of the housing sector to growth in year to terms is not likely to be significantly affected.

PN900

And to get an idea of the difference between the magnitude of the housing impact in the lead up to the December quarter 2000 and the magnitude of the sort of housing impact that is being foreshadowed, the Commission will see that in the lead up to the December quarter 2000 growth fixed expenditure on dwellings had decreased by minus .6 and minus .7. So it is that sort of a level of effect which had the impact that we saw in December 2000.

PN901

No one is predicting that sort of level of effect in any moderation which occurs in housing in the future. People are saying growth may not be as strong but no one is suggesting that we are going to see the sort of slump in housing that we saw in September and December 2000. So the focus on housing, which the Commonwealth make and which the AIG refer to, in our submission, are not borne out by the figures when one looks at what is the likely trend in housing in that regard. If one looks - - -

PN902

JUSTICE GIUDICE: Mr Watson, are these absolute figures, or are they in some way relative figures? Do they measure the actual increase and expenditure on dwellings?

PN903

MR WATSON: No, no, they are the contribution - - -

PN904

JUSTICE GIUDICE: Yes, I follow that, yes.

PN905

MR WATSON: Yes.

PN906

JUSTICE GIUDICE: GDP decline but there was still growth in expenditure and dwellings, on dwellings, what would those figures look like?

PN907

MR WATSON: Well, what would happen is is that there would be a percentage contribution to GDP growth for dwellings, but some other area of the accounts should show larger negatives which would overshadow it.

PN908

JUSTICE GIUDICE: Yes, yes.

PN909

MR WATSON: If you like you can add up down the column and you get the end number. So there will be pluses and minuses as you go down, hopefully more pluses than minuses. But if you do happen to have a negative quarter it means that your minuses have outweighed your pluses.

PN910

JUSTICE GIUDICE: Yes, so the GDP figure at the bottom is simply the total.

PN911

MR WATSON: Yes.

PN912

JUSTICE GIUDICE: Yes.

PN913

MR WATSON: Yes, and it is trend figure, so the December quarter is, of course, not a negative. The trend never went negative in December quarter 2000. It actually was always slightly positive. As you can see, perhaps kept in the game by the statistical discrepancy in that case, but in any event.

PN914

So that is the position in relation to dwellings. When you factor in the fact that there will be a drop out of a negative growth contribution from the March quarter of last year, even some moderation will still be seeing a positive contribution from dwellings, and we certainly will not be seeing anything like the negative contributions we saw in December 2000. If one goes then to the exports area, which is close to the bottom. There are three lines. There is exports of goods and services less imports, and then there is a net exports figure.

PN915

If I can take the Bench to the net exports line first, there have been two quarters there, the two most recent quarters, where there has been a negative contribution to growth as a result of net exports. But in relation to that, of course, we rely on the Treasurer's assessment that the negative impact of external influences has bottomed. Now, we may be in a situation where there is a negative contribution in the next quarter, but if the assessment that the external influences, the negative impact of the external influences has bottomed is correct, then at the time the Commission's decision starts to take effect, which will be in the June quarter and succeeding, one might expect a positive number there in terms of contribution, or at the very least a much smaller negative number.

PN916

JUSTICE GIUDICE: The currency does not seem to be assisting that result at the moment.

PN917

MR WATSON: Well, no, your Honour, but the currently is still at historically low levels compared with - well, really all of our major trading partners but particularly the US. And there is particularly, with an anticipated recovery in the global economy, much more likely than had previously been anticipated. There will be a growth in export markets and one would expect that the top line of those three exports of goods and services would start to show better results.

PN918

The other issue about the net exports figure, of course, is that net exports is exports less imports, and imports have grown recently because of relatively high levels of consumption. If, as it is contended by the AIG, there is some drop off in consumption, then the impact of imports will be likely reduced as well. So these things are all interrelated. It is not as though you can say, well, there is a potential drop off in consumption and that has a particular outcome. It does have a particular outcome but then it may have a beneficial outcome at least so far as the net exports figure is concerned.

PN919

Yes, I am reminded that the net exports figure was coming off a high level because of the low Australian dollar and so on, and it cannot be expected that it would stay necessarily at those high levels indefinitely. But in any event when one looks at those two primary suggestions, a moderation in house and/or consumer spending and the international outlook, what table 5 shows is that when one looks to the future the expectations for the future are not such that one should significantly revise down the overall perspective on growth.

PN920

Now, while I am at it, I should just draw attention to the machinery and equipment numbers which have not made much of a contribution to this year to figure, you will see at .1, but that is because in March and June of last year you had negative numbers. September and December you have had very strong positive contributions, and indeed, as we indicate in our reply submission at paragraph 4.29, in seasonally adjusted terms machinery and equipment expenditure jumped by 12 per cent in the quarter, and 7.9 per cent over the year.

PN921

The trend figures, as always, are a bit more moderate. 3.7 per cent in the quarter and 1.5 per cent in the year. But again in relation to machinery and equipment, in succeeding quarters those negative figures will start to drop out and one might expect a greater contribution to growth from machinery and equipment.

PN922

In terms of the international outlook, can I make the following additional submissions. We have referred to the Treasurer's comments which we quoted in our reply submission at 4.53, page 58. In our reply submission we refer to the OECD composite leading indicator and that composite leading indicator indicates most recently increases for the US of 2.2, the OECD 1.1, the Euro area .7, and even in Japan .2. Most recently the US economy was anticipated to have had - originally anticipated to have had a negative December quarter for real GDP. That has been revised up now twice from an annualised rate initially of .2 per cent up to most recently 1.7 per cent.

PN923

So the trend in the US economy suggests that consistent with the broad picture we are painting, the negative downturn, which everyone had expected, has neither been as deep or as sustained as was originally anticipated things are being revised upward.

[10.37am]

PN924

That leaves, in our submission, the two other arguments to deal with - and I will come back to public comments, two other arguments to deal with - and that is productivity which the AIG referred to, and interest rates. In our submission, contrary to the submission of the AIG, most recent data suggests that productivity has returned to its pre-existing trends.

PN925

In the December quarter national accounts, productivity was 5 per cent higher than a year ago, and can I take the Commission to our reply submission at page 52. It is in paragraph 4.45, but I want to take the Commission to the quote which is in page 52 after the commencement of the paragraph. And the Treasurer says:

PN926

The national accounts also provide further evidence that strong economic growth continues to be accompanied by low inflation and record high productivity growth.

PN927

And he went on to say:

PN928

There is very strong productivity growth that has been recorded in these national accounts rising to be 10.8 per cent higher at the end of the year than it was at the beginning of the year. In fact, the highest rise in productivity since quarterly national accounts have been taken.

PN929

The Treasurer has no doubt about where productivity sits in relation to longer term trends and, in our submission, the AIG are unnecessarily pessimistic in their submissions in relation to that issue. In relation to interest rates, which is raised by the ACCI, we note the following. Firstly, interest rates are at historic low levels. Secondly, whilst there is likely to be some up rating of interest rates in the foreseeable future if received economic commentator wisdom is to be believed.

PN930

That is being talked about in the context of a moderation and a return to a more neutral stance in relation to growth. It is not being suggested that a moderate increase in interest rates will throw the Australian economy - except perhaps by the ACCI - that a moderate increase in interests rates will throw the Australian economy on to a negative growth path.

PN931

What is absolutely clear, of course, about interest rates is that wage cost pressures play no part in anyone's discussion about what should happen to them. The Commission can go through all of the commentary in recent weeks about why rates might need to rise, and one will not find any significant reference to wage cost pressures as a reason for that.

PN932

There is a suggestion that the economy might be growing faster than had been anticipated and that there might be a need to moderate it, and I am sure there is the odd commentator who, as a matter of sort of religious fervour, always feels the need to mention wage cost pressures, but in the broad economic debate there is very little being said about them.

PN933

In relation to the proposition that we make that the public commentary of the parties is contrary to the positions which they attempt to advance in these proceedings. I have already taken the Bench to the public commentary of the Treasurer in relation to the Commonwealth's position and there are some other - obviously, some other quotes in the reply submission and elsewhere which we refer to.

PN934

In relation to the ACCI, can I take the Commission to paragraph R4.51 in our reply submissions. That is at page 53 and there we set out a number of recent private sector survey results. Now, the ACCI has a bit of a go at us about criticising their survey and its methodology and them relying on them.

PN935

Well, we as we indicated last year do not place a great deal of faith of the efficacy of employer surveys and, in fact, we indicated that again this year, but what it does highlight is the stark contrast between what business is saying out there in the public debate and then what they come and say in these proceedings. The ACCI/Westpac survey of industrial trends starts with the quote:

PN936

The new year has begun on a confident note. Results of the March quarter 2002 survey show that economic activity has continued to expand.

PN937

And they go on and talk about the situation in the United States, and then over the page, the last sentence:

PN938

Forward projections for the next three months are buoyant.

PN939

It is a good word to use -

PN940

- and reflect robust actual activity levels.

PN941

And Mr Rowe who was at that stage the acting chief executive, comments:

PN942

This is very good news. The Australian economy has proved very resilient. Solid, sustained growth is underway.

PN943

Something the ACCI goes to extraordinary lengths in its submissions to suggest has not occurred:

PN944

Outcomes and predictions for new orders and output are robust. Capacity utilisation is at a historical high levels. Capital expenditure plans for the next 12 months are strong. Export performance has recovered. Particularly encouraging is the pause in job shedding resulting from the continuing improvement in the labour market.

PN945

And that pretty much sounds like our case. It certainly does not sound like theirs. Then in R4.52 there is the quote from Mr Evans, from the Westpac Banking Corporation, who jointly published the survey with the ACCI, and I particularly wanted to go to the last part of that quote:

PN946

Of most interest is the strong growth in the employment conditions. Our research indicates that this is likely to be pointing to a solid recovery in labour market conditions through 2002.

PN947

Now, we have included some other surveys there and the tone of them all is much the same. Out in the public debate business is saying that the economy is booming. They are saying it is buoyant. In here they want to tell you that not only is it not buoyant but that you should be excessively cautious because of overstated uncertainty. They should be held to account for what they say on the public record. And they should be made, as it were, or almost estopped from denying the position they take outside. If they say the economy is buoyant out there, then let them be honest and say and accept that it is buoyant in here.

PN948

Now, the AIG in terms of their public comments, we do not have any in the material and what is interesting is that we do not have any in the material that they have tendered. Last year the AIG were very keen to take the Bench to their PMI, their production manufacturing index, and their survey of Australian manufacturing. This year there is a remarkable absence of either of those documents. And that is because they both show precisely what the AIG do not want to talk about in these proceedings. They both show buoyant economic conditions and a positive outlook.

PN949

I focussed mainly on growth. Can I deal briefly with just a few other parts of the necessary economic picture. Wages and Prices, in our submission, are not significant problems. Inflation at 3.1 per cent is clearly not of such concern to the Reserve Bank that it feels it needs to move rates. It is modest by historical standards and forecast to come back within the RBAs target range in the course of the year.

PN950

Wage cost pressures at 3.4 per cent are modest and I have already made some broad submissions about that. The labour market, there was good news in February. Seasonally adjusted employment growth of .7 per cent in January was followed by .2 per cent in February and the employment growth number was 1.8 per cent higher in February 2001 than it had been a year before.

PN951

In trend terms the corresponding figures are .2 per cent growth in January, .2 per cent growth in February and 1.5 per cent higher over the year. Unemployment fell to 6.6 per cent in seasonally adjusted terms and 6.7 per cent in trend terms. The prospect of strong growth, as everyone is saying, suggests that there will be further improvement in the labour market at the time which the Commission's decision is likely to take effect.

PN952

Buoyant economic circumstances is, we think, an absolutely appropriate description of where we are. It is, as it happens, the ACCIs own description and we think a pretty fair summary of what the AIG and the Commonwealth are both saying outside of these proceedings. So we have done demonstrated need, we have done buoyant economic circumstances, negligible economic effect.

PN953

The starting point for this is our costing. The Commission will be aware that we have costed our claim and the thing that stands out, at least as between the Commonwealth and ourselves in relation to this issue, is just how much the gap has narrowed in terms of the controversy. There are still issues between us about a range of matters, whether you adjust for safety net flow, whether you include the private sector only, or whether you include the public sector in calculations.

PN954

But in our original submissions and in our reply we endeavoured as much as we could to narrow the scope of those controversies by providing a range of assumptions and to show just how little impact overall those differences now make to the overall debate. And what the overall debate on costing boils down to in this case is that we say our claims of the order of .5 per cent in gross terms as an additional to wages, .2 per cent in net. The Commonwealth say our claim adds .59 - we say .5, they say .9 - and when - - -

PN955

VICE PRESIDENT McINTYRE: .59.

PN956

MR WATSON: Yes.

PN957

VICE PRESIDENT McINTYRE: You said .9.

PN958

MR WATSON: I am sorry, .59, yes. That would be a bit of a difference.

PN959

VICE PRESIDENT McINTYRE: Exactly.

PN960

MR WATSON: We say .5, they say .59, and when you look at it in net terms, we say .2. Properly analysed their material gives basically the same number. Now, in the debate they run a million miles from the suggestion that you can work out in their impact and I will come to that later. We think their proposition on that issue is just simply unsustainable, but that is the broad picture. The differences in costing, our .5, their .59, and when you look at the way the Commission has approached this in the past, it must be accepted that their .59 is a statement of potential rather than likely actual impact.

PN961

Every year the Commission has accepted that calculating the cost in the way the Commonwealth does states the potential impact rather than the actual likely impact because the Commonwealth's inclusion of things like section 170MX awards, paid rates awards where - which have been converted where residual amounts would still be sufficient to absorb any increase and errors in reporting and the like.

PN962

And in each of the cases for the last few years the Commission has accepted that the Commonwealth's computation of effect is potential rather than actual likely. So we are saying around .5, they are saying .59 and it must be accepted on the basis of the previous decisions of the Commission that that .59 is higher than the likely actual impact. The scope of the debate in terms of absolute impact has narrowed extraordinarily.

PN963

Now, the only other party who provide a costing apart from the Commonwealth are the ACCI and, as we will get to later, for various reasons we just do not even think they are in the game. They are off on a different paddock entirely.

[10.53am]

PN964

But I will deal with the ACCI separately. For the first part of these submissions I want to focus on our position vis a vis the Commonwealth. Can I just while I am at it, make a correction to table R3.3.

PN965

JUSTICE GIUDICE: Is this in the reply submissions?

PN966

MR WATSON: Yes. And it is at page 25. The Commission will be aware from having read the submissions, we had to adjust various figures because of some proportions data from the ABS being inaccurate. What has unfortunately happened with table R3.3 is that we deleted the wrong figure and so we deleted the figure which did appear for - no, I am sorry, I think that is right. Late last night it looked wrong, but I think today it looks right. I will come back to that issue.

PN967

I will just confirm. No, I think on reflection I have got that wrong, the table is right.

PN968

JUSTICE GIUDICE: Do you want to say any more about this, Mr Watson?

PN969

MR WATSON: Probably the less said the better.

PN970

JUSTICE GIUDICE: You can let us know if there is a problem.

PN971

MR WATSON: I will. No I am - yes, I am sorry, there is a problem. All aware dependants adjusted for safety net flow should be .45. And private sector only should be .56. Those figures are reflected in the relevant portions of the composite exhibit. So whichever of those numbers one takes, in our submission .5 is a reasonable summation of what the gross impact is and .2 a reasonable summation of what the net impact is.

PN972

As to the net impact the Commonwealth says you cannot look at the net impact because to do so is to assume that the Commission will award this year what it awarded last year. Well, in our submission, that is a ludicrous submission. It is certainly contrary to the Commission's own process of assessment in its decisions, when it has considered the aggregate net rate of wages growth as a result of its decisions, in effect a net impact issue, and the pipeline effect.

PN973

And in our reply at paragraph R3.10 we set out some of the references in previous decisions to those concepts. And the Commission will see that it is a frequent reference. Basically every year the Commission since 1998, the Commission has referred to the aggregate net rate of wages growth or the pipeline effect of previous decisions in assessing broadly the impact. There are two issues which the Commission has to regard; it has to have regard to the absolute impact and on that the Commonwealth and ourselves are in furious agreement, and it has to have regard to the net impact.

PN974

We think that is an entirely logical position. It is hard to countenance, apart I suppose from the obvious fact that they do not like what the net impact consideration generates, why the Commonwealth spends so much time disavowing the concept. Now, in our submission you can calculate from the Commonwealth's submission what it would say the net impact is and we provide a calculation for that in our reply submissions. Essentially they say that their position in these proceedings is a .11 per cent, contribution to aggregate wages growth.

PN975

And they say that relative to their position last year's decision added .3 to aggregate wages growth. So that gives an absolute impact of last year's decision of .41, if you add those two figures together. They say that our claim this year would add .59. .59 minus .41 gives a net impact of .18, .2 per cent. That is broadly confirmed, although the figures are slightly different if one looks at the Commonwealth's own estimate of what a flat dollar increase of around $15 would have been in last year's proceedings.

PN976

The Commission will recall it provided the Commission with a table of what a flat dollar increase at various levels would be. If the Commission looks at the $15 amount it is a slightly different number. But broadly it is the same and when one does the sums, one ends up with .2, rounded down to .2. I think the differential becomes something like .22 under that analysis. So either way it is .2, the net impact. Now, in terms of the absolute impact, the absolute impact of the decision is in our submission virtually precisely the same as the absolute impact of the 1998 decision.

PN977

And the Commission will see that in our submissions, our original submissions, at paragraph 3.24 on page 49. Can I take the Commission to that. Did I say 45, I said 49 didn't I, it is 45, I am sorry. At 324 we say, in this context it is worth comparing the cost estimate of the ACTUs claim this year with the cost estimate of the Commission decisions in years prior to last year. There are significant data limitations for the years prior to 2000.

PN978

Nonetheless we note that in its 1998 safety net review decision the Commission held that the increase awarded in that case was a .44 per cent addition to aggregate wages costs. And we go on about to say what the previous decision was. .44 per cent, the lower end of our costing range is .5 and, of course, we are saying broadly speaking .5. And then over on page 47 the Commission will see a table from the table 3.5, from the joint coalition governments as they then were, their estimate of the 1998 decision, .57. Their estimate of our current claim, .59.

PN979

So in terms of absolute impact what we are talking about is, in a statistical sense, basically the 1998 decision. In terms of the net impact can I just take the Commission to what we say are the results of yesterday's cross-examination in relation to the TRYM modelling. The results of the TRYM modelling rely on a comparison between - which are in the original Commonwealth submissions, rely on a comparison between our claim and the Commonwealth's proposal relative to the mid-year economic and fiscal outlook base line.

PN980

And the Commonwealth justifies this position at paragraph 4.34 of its original submissions to say that wage forecasts in MYEFO incorporate the economic effects from the economy of the Commonwealth Government's position, that is their specific claim. What they do then is feed in the difference between our claim and their proposal into their modelling, implicit in such an approach, and they report the results as departures from the MYEFO base line.

PN981

Implicit in such an approach is that MYEFO, the MYEFO forecasts do not include any of the effects of our claim. The evidence yesterday establishes that that is simply not so. The evidence of Mr Dehne, is - - -

PN982

VICE PRESIDENT McINTYRE: Mr Taylor.

PN983

MR WATSON: Yes, Mr Dehne Taylor, yes, sorry. The evidence of Mr Taylor at paragraphs 388 and 393 is instructive and can I take the Commission to it. So it is paragraph 388 to 393, and I say:

PN984

So I take it from your answer then that in terms of the forecast of AENA for 2002/3, that figure it is impossible to dis-aggregate any part of it and say that much of it is award wages growth?---That would be correct, yes. That is in terms of how we arrived at it, but you could probably come up with some formula about how many people are on award wages and then discount it for - I mean if you spend a couple of weeks you could probably end up dis-aggregating the number. Whether it was right or not I don't know, but you could actually do a dis-aggregation. Certainly from your end there is no dis-aggregation?---Not in that way, no. So it wouldn't be possible to say to the Commission the aggregate wages figure which was published in MYEFO for 2002/3 incorporates .1 per cent for award wages growth, .3 per cent for award wages growth, or .6 per cent for award wages growth?---That is what I just said. Yes.

PN985

So indeed the MYEFO figure published for wages growth might include a figure for award wages growth of .6 per cent?---No not if we haven't given it a particular value I don't see it. But you - I'm sorry, I just don't follow. I have just said we don't have a particular value and then you said you could attribute a particular value to it, I just don't follow that. I am saying that you can't rule out, perhaps if I put it that way, you can't rule out that that number incorporates -

PN986

And then I - which is 4 1/4 I think -

PN987

it incorporates .6?---Well, as I said, if someone wanted to spend a couple of weeks trying to dis-aggregate that number and attribute certain factors of the economy to certain parts then maybe they could come up with .6, they might come up with 223 for all I know. I mean it doesn't make any sense to me, why would you do that.

PN988

.6 is the figure, the absolute impact of our client. The Commonwealth cannot tell you that it is not in the MYEFO baseline. They can't tell you that they haven't already factored in .6 into their forecast for wages growth in 2002/3. Their modelling assumes that no part of our claim is in that baseline but what Mr Taylor makes abundantly clear is that the lot could be, the whole lot. Now, if that is the case, then there is no economic effect relative to the MYEFO baseline from our claim, none. We could produce our own table, the equivalent of table 4.4 and it would just have a series of zeros down the side. Then Mr Taylor - or, rather, earlier, at 378, makes clear that they do pay regard to the ACTUs claims and to previous decisions. At 378:

PN989

Does the 2001/2 forecast for wages growth published in MYEFO incorporate any assumption regarding award wages growth for that year?---No explicit assumption, no.

PN990

Implicitly, do you assume that award wages growth will follow a pattern of similarity to previous years?---In terms of it being a part of an aggregate number, then I think that would probably be a correct assumption, yes, but as it is not an implicit/explicit assumption, if I might say, if that makes any - - -

PN991

And in your forecast of wages growth for 2002/3, is there any explicit assumption made regarding award wages growth?---Only in the sense of where we looked at the balance of risks.

PN992

And could you explain what you mean by that?---Well, we would be looking at what sort of an amount, particularly what is being claimed, say by the ACTU, what effect that might have on wages, if that was to be awarded.

PN993

So that is a risk that you factor into your assessment of what wages growth - - -?---It is one many risks; yes, that is correct.

PN994

And so to the extent that you take account of the amount which the ACTU claims - - -?---It is a general number that we would be looking at as to what might be an approximate limit as to how wages would grow, but, of course, we wouldn't assume that it is an absolute, but you have a sort of balance of probabilities.

PN995

In other words, this is done at an aggregate level, these wage forecasts. To the extent that they pay any regard to award wages growth, it is done in the broadest of terms and to suggest that the MYEFO forecast for 2002/3 of 4 1/4 per cent wages growth somehow incorporates .11 per cent, as the Commonwealth proposes, but does not incorporate .3 or .4 or .6 is simply false. It is an assertion that has been repeatedly made in these proceedings when the Commonwealth has gone to this matter but it just doesn't stack up. Now, if the whole of the .6 is incorporated in the MYEFO forecast, as I have indicated, there is no effect.

PN996

As Mr Taylor indicated, there is an assumption in the aggregate number that award wages growth will follow a pattern of similarity to previous years. That was at 379. In our submission, that suggests that if you are not going to assume no effect, then the only logical thing to do is look at modelling the net impact. The Commission will recall the questions which we asked of Ms Gabbitas in relation to table 4 and, in particular, the Commission will recall the process by which we took her through the various assumptions, and at ACTU9 we provided Ms Gabbitas with a chart. The Commission will recall we led her through this.

PN997

The first column she agreed was likely to reflect the numbers which were actually produced in table 4.4 but instead of referring to GDP level and employment level we refer to growth. The second column she agreed was likely to broadly indicate a .48 per cent input but without the Reserve Bank policy response switched on. The third column she agreed was likely to broadly indicate what a .2 per cent input, that is, what we say the proper net input should be without the policy response assumption. Now, at paragraphs 579 to 582 of the transcript, Ms Gabbitas makes our case because I said to her:

PN998

Well, if I can take you to that last column, can I suggest to you that outcomes like that are properly described as negligible?---Is this for all variables?

PN999

Yes?---Yes.

PN1000

There is no meaningful change to the baseline?---For the variables presented in that table?

PN1001

Yes?---No, no meaningful change, negligible economic effect.

PN1002

In terms of our argument that the Reserve Bank function should be switched off, in ACTU9 the Commission will see that a .2 per cent input leads to an inflation impact of .1. It is actually precisely the figure we suggest in our submissions. At a .1 per cent impact on inflation, we think it is entirely appropriate in the light of the history of the Reserve Bank's approach to interest rate movements to switch off the Reserve Bank and financial policy response mechanism in the model.

PN1003

The assumptions which the Commonwealth makes in its modelling about the way the Reserve Bank operates are, in our submission, totally unrealistic. I won't take the Commission to the transcript but I refer generally to paragraphs 510 to 530. Ms Gabbitas says no meaningful economic effect, describes the impact as negligible. The Commission is in the happy position of not having to rely merely on that concession. Other evidence yesterday leads to that assessment on an independent basis.

PN1004

If one considers the errors in the model equations, standard errors in the model equations, which we went to at paragraphs 598 to 607, the inability of the model to explain more than 60 per cent of variation in historical data on wages, unemployment and employment in paragraphs 608 to 611, errors in input data and, in particular, the reference to the standard error on the employment level, being currently 37,400, and errors in the MYEFO forecasting record, which is, of course, the baseline from which all of this is being modelled, particularly when one pays regard to the fact that the periods which we are talking about are years 2 and 3 of the MYEFO forecasts and predictions, and in that regard can I refer generally to ACTU8 and to paragraphs 424 to 429 and paragraphs 431 of transcript where it is evident that Mr Taylor thinks that anything of the order of plus or minus 1 per cent in those out years is a pretty good forecast or prediction.

PN1005

So in terms of the issue about economic effect, the Commission is in the happy position of a significant narrowing of controversy in these proceedings. The Commonwealth's assessment of the absolute impact of our claim is not significantly different from our own and, as we have indicated, must represent an overstatement of the actual likely cost. When one considers the net impact of our claim and the economic effects which result from it, one is either left with saying that the TRYM modelling demonstrates a zero effect or that it demonstrates an effect which their own witness concedes is negligible.

PN1006

Then the Commonwealth in its submissions recycles an old submission that they have run previously about the indirect effects of our claim and, in our submission, that grossly inflates the potential impact of that claim. Can I take the Commission to table 4.3 in the Commonwealth's original submissions. I don't have a page number for that. Let me endeavour to quickly turn it up. It is at page 69. The Commonwealth lists a range of agreement categories in that table which they say illustrate the potential for flow-on or indirect effects of a safety net adjustment in these proceedings.

PN1007

Looking at table 4.3, closed to safety net increases is, of course, the overwhelming majority of the category but there are then four categories for which the Commonwealth makes a claim of potential indirect effects. They are: where consistent with safety net review, safety net increases conditional, safety net increases automatically passed on, and unspecified. Starting with the one about which there can be little argument, safety net increases automatically passed on, it is important for the Commission to focus, in our submissions, if one is considering the indirect effects, not on percentage of agreements but on percentage of employees, because that is what will create an aggregate wage cost. The Commonwealth asserts in that table 1 per cent of employees covered by safety net increases automatically placed on in the population of employees covered by a federal agreement.

PN1008

[11.23am]

PN1009

Now, even if we assume that that proportion is consistent across all of the states 1 per cent of employees covered by registered agreements, the employee earnings in our survey tells us is .4 per cent of the total employed population, .4 per cent automatically getting a flow on. And that is not something which the Commonwealth contests in their reply. It is something we averted to in our reply and it is not something they contest, .4 per cent automatic.

PN1010

So then it is a case of saying, well, what about the other categories. The unspecified category is, we think, a complete furphy. What that says is that because an agreement does not specifically say you cannot get the safety net increase, that a claim might be able to be made for them. Well, even on the most adventurous reading of the Emwest decision. We do not think it is open to say that merely because an agreement does not expressly rule out claims to safety net adjustments, if it deals with wages then it can hardly be said that it does not deal with the area of wages and so another claim can be advanced.

PN1011

So the unspecified category, which is where they get all their bulk from, if you like, that is a complete furphy. That leaves two categories. It leaves the category where the agreement provides for increases where consistent with the safety net, and it leaves the category where safety net increases are conditional. Now, in our reply submissions we made the point that in each of those categories you will have had for most people a situation, the overwhelming majority of people, a situation were enterprise bargaining rates have now advanced significantly beyond the award rate. I mean, that is what the EEH data shows. And in that context even a $25 increase is not going to trigger the overwhelming majority of those provisions.

PN1012

Now, the Commonwealth's response to that in their supply submissions is to talk about the proportion of agreements which are first round agreements. I want to deal with that because there is some more maths involved here, and I am sorry to do this to the Commission, but can I ask the Commission to bear in mind this figure for the purposes of where we are going. Those two categories, where consistent with safety net review and safety net increases conditional, those two categories on the Commonwealth's own data constitute 12 per cent of employees covered by federally registered agreement. 12 per cent of employees covered by federally registered agreement.

PN1013

Now, for the purposes of where I am going, I am going to assume that that proportion applies across State systems as well. So that it is a big assumption, in a sense, because there is no evidence. But let us assume, in a sense contrary to our interest, that what the Commonwealth have established for federal agreements applies across the state agreements uniformally. 12 per cent.

PN1014

Can I take then the Commission to Commonwealth reply R4.12, and that is at page 23 of the reply submissions. This is what they say:

PN1015

The ACTUs reply submission makes the assumption that such agreements would overwhelmingly not be entitled to receive any increase by reason of the absorption principle. This assumption can only be made where the safety net increases are granted at a very minor level. Over 40 per cent of federal wage agreements are first time agreements.

PN1016

They say, and then they footnote that, and they say:

PN1017

40.9 per cent of federal wage agreements that have been checked for replacements are first time agreements.

PN1018

Now, our first submission is that we are not by any means convinced of the voracity of that figure as being actual first time agreements, as being a proportion of actual first time agreements. But in any event, for these purposes, we are prepared to work with it. When a first agreement is made, moving employees directly from award paid rates, the agreement is likely to be relatively close to the award rate, they say. And then go on:

PN1019

First agreements often grant a percentage increase -

PN1020

and they give an example over the page, which I will come to. But let us just do some of the maths. They talk about 40 per cent of agreements. But in previous cases their own material establishes that the proportion of employees covered by first agreements in this way they define them is about 10 per cent. So it is all very well to talk about a proportion of agreements, but the proportion of employees is about 10 per cent.

PN1021

COMMISSIONER LEWIN: Mr Watson, it does not actually say that, does it? It says "agreements that have been checked".

PN1022

MR WATSON: Yes, indeed.

PN1023

COMMISSIONER LEWIN: We do not know what has been checked and what the level of extrapolation is.

PN1024

MR WATSON: Indeed, and these submissions are very much are on the basis of accepting for the purposes of argument that figure. But as I indicated, we - and this no more than intuition based on experience, but it seems an extraordinarily high number. If you are talking about actual first time agreements for that to be 41 per cent of all agreements that come through the Commission. That seems to us to be rather high.

PN1025

COMMISSIONER LEWIN: Well, the sample is not identified, is it?

PN1026

MR WATSON: No, no, it is not.

PN1027

JUSTICE GIUDICE: It also seems to be consistent with submissions we have heard, I think, from the Commonwealth in the past about the increase in bargaining or the development of bargaining under the new system.

PN1028

MR WATSON: Yes. Yes. Indeed, last year they were here telling the Commission that there was a risk that things were slowing off, yes. But in any event, as I have indicated, for the sake of the argument from here, let us assume 40 per cent. But in fact what their material in previous cases has indicated is that the number of employees covered by such agreements is 10 per cent. Even on their definition. So for an employee to be affected on this basis they have to be in the 12 per cent of the population of employees covered by agreements, where agreement say consistent with the safety net or conditional.

PN1029

They have to be in the 10 per cent of that population which are first time agreements. And they have to be in the 40 per cent or thereabouts of the overall employee population who are covered by a registered agreement. When you do the maths that is about .5 per cent of the workforce might be potentially affected. On that scenario. So .4 per cent actually get an automatic increase, and on that sort of a calculation, which we think likely overstates it, about .5 per cent would be affected in the other two categories.

PN1030

Now, implicit in that is an assumption that the distribution of those two categories of agreement is the same in first time agreements as it is in other agreements. We do not see any reason to depart from that assumption. But the Commission will see that even if one adjusts the percentage upwards and says that they are more predominant, we are still talking about incredibly small numbers in an overall sense who are likely to be affected. So they simply have not even begun to demonstrate the proposition for which they contend that there is likely to be significant indirect effects.

PN1031

Now, they go at page 24 to the example of the Croft Health Care and Eltham Nominees and HSUA (Victoria) Number 1 Branch Enterprise Agreement. Can we say a number of things about that. We have had a look at that agreement. It is not immediately apparent precisely but it appears to us that the agreement applies to in the order of 20 or so employees, perhaps a few more. But we are certainly not talking about an agreement with extraordinarily extensive coverage.

PN1032

We have tried to check the actual figure and been unable to obtain it. But the other thing, and perhaps more minorly, table R4.1, the calculation of the absorption effect is, in our submission, wrong. And that is because the Commonwealth, in our submission, have failed to calculate the 3 per cent increase on the wage rate as it would have been at the conclusion of each year. So the Commission will see that in column B they look at the rate - the agreement rate with partial absorption of the safety net increase, and in the first two years the safety net increase was not fully absorbed so wage rates actually were slightly higher than the agreement rate provided.

PN1033

When one looks at the agreement, the agreement makes clear that the 3 per cent is applied to the wage rate existing as at the relevant anniversary date. So the 3 per cent should be calculated on 474.20, and then if that is not subject to absorption of whatever the amount is and so on. It does not make an enormous different, but it does make about a dollar's worth of different, a dollar or thereabouts. That may not seem enormously significant, but remember this is an example that they give and the example they give they have overstated the impact by 10 per cent in effect. At paragraph 4.15 they say:

PN1034

In addition agreements can and do override the absorption principle.

PN1035

JUSTICE GIUDICE: Mr Watson, if that is not too inconvenient a time, we might break for 10 minutes or so.

SHORT ADJOURNMENT [11.37am]

RESUMED [11.52am]

PN1036

JUSTICE GIUDICE: Yes, Mr Harnath.

PN1037

MR HARNATH: Yes, your Honour, if I might just for the record I would like to announce an amendment to my appearance from this time. MR MOIR is appearing with myself for the Association.

PN1038

JUSTICE GIUDICE: Thank you, Mr Harnath.

PN1039

MR HARNATH: Thank you.

PN1040

JUSTICE GIUDICE: Mr Watson.

PN1041

MR WATSON: Yes, your Honour. Before the break I had been taking the Bench through the Commonwealth's suggestion that our claim resulting in significant indirect effects. In their reply submissions at R4.15, that is at page 24 and over to page 25, they make the statement:

PN1042

In addition agreements can and do override the absorption principle.

PN1043

And they provide what they say are two typical examples. In our submission, those two typical examples appear to us to be examples of cases in which employees - one I must say is a bit hard to understand - but that is the Federal Award Officers Agreement, which is the second one, but the first is one which is clearly in the category of an automatic flow on of the safety net. That is, the category which we commenced our discussion with, .4 per cent of the overall workforce.

PN1044

So the end result of all of that is that on the best case for the Commonwealth, in our submission, there might be in the order of less than 1 per cent of employees who might get some sort of partial flow-on or full flow-on of the safety net increase. Now, to give the Commission an indicator of just how that impacts on things in terms of costings which have been where we are, basically on the Commonwealth's own numbers for each additional percentage of employee affected, you add less than .3 per cent to the aggregate wages cost bill.

PN1045

So on their best case on this issue, we are talking about a costing that instead of being .59 should be around about .61 or thereabouts. So there is a lot of pages devoted to the argument, but when properly analysed for little effect both in an economic and in other senses. The criticisms - can I turn now to the ACCI - the criticisms we make of the ACCI costing are numerous and in the end we say they render that costing wholly without foundation.

PN1046

Firstly, the ACCI costing is not a whole of economic costing. It is limited to the private sector. Secondly, they use a figure in their calculation - and I will take the Commission to this - I can take the Commission to the costing which is at page 70 of their submissions, commencing at page 70, the table which I actually want to take the Commission to is at page 74.

PN1047

Now, if the Commission recalls, this is meant to be a private sector costing. In fact, the number that they use in the fourth column for the weighted increase sought by the ACTU is the figure which we calculate for both public and private sector award-only employees. That is the first issue. They use 1995. Now, in any event, as the Commonwealth has pointed out to us, that was an over-estimate because of the incorrect data that we initially used.

PN1048

But if you are going to do a private sector costing, then you should use the private sector number. And the private sector number emerges from our composite exhibit and if the Commission goes to page 45 of that composite exhibit, the Commission will see that the weighted increase for private sector award-only employees is $18 or thereabouts. So they have plugged in a figure which was for all award employees.

PN1049

It is a figure that, as the Commonwealth drew to our attention, we had over-stated, in any event. When you look at the private sector number, it is $18. Now, that is a significant difference in terms of their estimate, if you like, of direct impact, because they have inflated, the number they have used is inflated by, in effect, 10 per cent. The second thing that they have done, in our submission, and this we accept has a - it is really the third thing, and this we accept has a less impact - is that their private sector total earnings figure they have not uprated to take account of when the Commission's decision will actually take effect.

PN1050

Now, the impact of that on its own is very much at the margins, we concede, but these things necessarily are cumulative calculations, so when you factor in a 10 per cent overstatement of the weighted increase, and an understatement of what private sector total earnings are, you start to compound the issues. But the real area of absurdity about the costing is in the calculation of indirect effects.

PN1051

The Commission will see on the table that there are some percentages in column 1 which are said to be sourced from the ABS for over-award employees and non-award employees. And as we pointed out in our reply, they are just nonsense figures. The figure which the ACCI has used for the proportion of over-award employees is the figure which the employee earnings in our survey records for employees who are on unregistered and registered individual agreements.

PN1052

That is a completely separate set of categories. Some people who are on over-awards will be treated by the ABS EEH survey as being on an unregistered individual agreement. Some people will be in that category, not all, and certainly not all people in the category of unregistered individual agreement would in any normal sense be described as over-award employees.

PN1053

Unregistered individual agreement, because the survey includes both non-managerial and managerial employees, includes a raft of people who are in any usual sense are understood to be completely outside the award system. So that 49.3 per cent is just a fiction. Now, in response to it the ACCI acknowledge in their response submission, oh, well, it's not perfect, but they say it's the best we have. Well, it is not even remotely the best they have. It is not even remotely close to the truth.

PN1054

Now, then below that in the proportions data they have non-award employees and that category is obtained from the EEH survey by summing registered and unregistered collective agreements. So their survey asked employers - and we will come to what was wrong with their survey later - but their survey asked employers: do you have any employees who are over-award who received an increase as a result of last year's safety net?

PN1055

And their survey asked: do you have any employees who are non-award who received an increase as a result of last year's safety net? There is simply no way that one can conflates responses to that survey with the categories of the EEH survey for registered and unregistered individual agreement and registered and unregistered collective agreement. It is a nonsense from start to finish.

PN1056

In the next column the ACCI describe a proportion of employees per category receiving increases directly through safety net decision, and they say the source of this is ACCI. This is their survey. Again, the numbers in the over-award employees and the non-award employees categories are completely fictitious. They come from the survey, yes, but the survey results are expressed as a proportion of employers, not a proportion of employees, something which the ACCI acknowledged in its own original submissions.

PN1057

So an employer with 1000 employees, one of who received an adjustment to their wages as a direct result of the safety net get slotted in here at full value. The ACCI calculation, in effect, says, well, all thousand of those employees got a flow-on. So in terms of the indirect calculation, the first column is nonsense. The second column is nonsense.

PN1058

That makes the third column, which is the multiplication of the two nonsense. The weighted increase column is an overstatement, and the private sector total earnings figure is an understatement. The net effect is that those last two lines are not even worth the small amount of paper they are printed on. And that is without even going to the problems with the survey. You just wouldn't even bother looking at them.

PN1059

[12.06pm]

PN1060

Now, in our reply submission we made some criticisms of the survey and they commence at 3.25. We say the response rate to the survey was poor at 17.6 per cent and that is particularly so in light of the exhortation which was contained in the covering letter that if the survey was to be credible it was important that there be a strong response from industry.

PN1061

The response rate for the safety net adjustments was even - safety net adjustment questions was even lower, ranging from 15.8 per cent to 16.5 per cent. 6.3 per cent of those responding to the survey did not respond to any of the safety net questions, and the sum total of all of that is that there has to be a very significant chance of non response bias in all of this. If you are not concerned about the safety net you are much more likely to have just not bothered to answer the questions or to not have bothered to put in a survey.

PN1062

The sample size which is about 350 is a small sample size and standard errors for results are likely to be large. That is particularly so when one considers the process by which the ACCI rated the survey. Wherein a range of the answers to questions are distributed into a range of different categories which are then all given weight to and gone up. And if the Commission wants to go to it, I won't take the Commission to it now, but at tab 4 of the ACTU reply composite exhibit, we attach the ACCI letters of 8 and 15 March.

PN1063

And in the letter of 15 March it is clear that in quite a number of the cells in their weighting process there were numbers that were less than 10. But a number less than 10 then gets blown up to be representative of a whole section of industry or a whole section of a particular business size category or whatever. In short, we say, the survey is wholly unreliable and we make that claim in relation to what the ACCI say about its costing and we make that claim in relation to what they say also about the employment effect.

PN1064

In relation to the employment effect we make some additional criticisms at 543 and 544 of our reply submissions and they can be found commencing at page 74. So in addition to the problems of non response bias and the likelihood of high standard errors, we make the point that the survey question requires employers to in effect conduct their own counter factual exercise. The overwhelming preponderance of firms record no effect. There are some internal inconsistencies in both the way the questioning is structured and in the responses to the questions.

PN1065

In firms where no employee received a safety net increase the proportion of firms responding that the number of full-time employees was lower than it otherwise would have been is less than the number who say they reduced full-time employees and increased part-time or casual employees; it is a bit hard to see how that works. And the number of firms reporting no effect on employment is for that same category of firms, is greater than the number of firms reporting an effect on full-time employment.

PN1066

Those sorts of things highlight the difficulties with the very minuscule proportions which are in play. Finally, questions 5 and 6, require responses regarding full-time employment, but question 6 contrasts full-time employees with part-time and casual. Now, as we note casual employees can be full-time. So the distinction which is drawn is not an appropriate one. In all, we would say for the reasons we have advanced, the ACCI material, both its costing and its employment effects material, should be paid no regard at all.

PN1067

At page 33 of our reply submission, go to turn - to micro economic effects briefly to conclude this section. At page 33 of our reply we start by looking at the average increase in award rates and then there is a consideration of the increase at the lower end of the spectrum in our original submissions. The average increase in award rates which we have calculated using the same methodology which we use to calculate the increase in previous decisions, as a result of previous decision, the Commission will see that in the revised table that is in the broad range of sort of 4.6, it ranges from 4.4 up to 4.8 depending on the cohort, but 4.6 is around about where it is.

PN1068

Once again looking at the wages measures it is less than or about the same as all of the AWE measures, it is a bit higher than average earnings on a national accounts basis. It is obviously higher than Wage Cost Index about which I have already said a deal. And it is a bit higher than the EB increases but less than senior management increases. Once again if we extract for the contribution award employees make to the aggregate figures the Commission will see that the average increase we seek is less than all of the AWE measures and a bit higher than the AENA measure and again it is higher than the Wage Cost Index measure, but for the reasons we have advanced we say the Commission ought not to pay too much regard to that in considering community wage movements.

PN1069

At the bottom end of the spectrum, if you like, the increased C14 is 6 per cent and the increase at C10, 4.9 per cent. We accept that those increases are at the higher end of the spectrum of increases for those lower wage levels. That is by design, the whole purpose of us submitting a claim for a flat dollar increase in these proceedings is so that an increase can be awarded to the lowest paid which is greater than the increase which is awarded in percentage terms, the increase which is awarded higher up the scale.

PN1070

The critical thing about the micro economic impact of the Commission's decision is that notwithstanding what continues it appears to be a raging academic controversy about the impact of minimum wage adjustments on employment, there are simply no observable employment effects in the three most award depending industries in Australia. Chart 5.3 in the Commonwealth's own submissions demonstrates that in the period of safety net adjustments - it is at page 96, chart 5.3 shows that in the period of safety net adjustments the growth in those three industries has exceeded the growth in all industries.

PN1071

Now the Commonwealth say well, look the accommodation, cafes and restaurant numbers down turned, well yes it has, but in their own submission they accept, in their own reply submission, they accept that that trend has stabilised. But the other critical thing about that is where has the downturn been, well it has been since about, well around about the start of 2001. Is there any link that one can draw between that change and safety net adjustments, well no there is not.

PN1072

When safety net adjustments were at their highest in percentage terms, that is November - or '98, and again in 2000, the growth line goes up. You just can't look at those charts and say, gosh isn't it obvious that is where the safety nets came in because everything turns down. Now, the Commonwealth will say well that's casually empirical because you haven't controlled for other factors, but that is the point really, that is the point. If there were a significant observable effect we might be able to see it, there is not a significant observable effect anywhere in those charts.

PN1073

You cannot look at those charts and say, yes, well let's look at May '98, gosh in all three industries where there are a significant number of award dependants you can see a drop off in employment. You can't say, all right let's look at May '99, where the Commission's decision was a bit less than May '98 in percentage terms, gosh, look there is a dramatic improvement in employment growth, post May '99. You just can't see it, it is just not there.

PN1074

COMMISSIONER LEWIN: Mr Watson, were these ABS figures adjusted for the Olympics at all, do you know?

PN1075

MR WATSON: No.

PN1076

COMMISSIONER LEWIN: They were not?

PN1077

MR WATSON: No. That is right, you have had a post Olympic downturn, you have had more recent September 11 stuff, it is not surprising that you get the position that you get on accommodation, cafes and restaurants. Now, in their analysis of the micro economic effects the Commonwealth deal with the suggestion, or make a suggestion that employees - the impact of a safety net adjustment will - in their original submissions they said the impact of the safety net adjustment would predominate in industries where there was lower productivity. We made the point in our reply, 78.1 per cent of employees on awards are employed in high, medium or not measured productivity industries.

PN1078

Now, the Commonwealth say well that is a bit cute because only .4 per cent are in the top three productivity industries and there is a bit in the middle and then there is a very significant chunk in industries where it is just not measured. But that is kind of the point really. For a start there aren't many employees all up in those top three high productivity industries. Secondly, the vast bulk fit in that middle category of either being middle level productivity industries or in industries where productivity is not measured. A whole stack of industries where productivity is not measured, well you either pull them out altogether and readjust your percentages which the Commonwealth have not done, or you include them.

[12.21pm]

PN1079

Now, we have referred in answer to some other questions, it just does not wash that 23.1 per cent of the workforce have not made a contribution to productivity. It just does not wash. And importantly the Commission should consider the negative impact on productivity of a low increase. It is intuitive that people respond well to reward. If the Commission consistently awards low amounts there is a risk of disillusionment and a risk of, as a result, an impact on productivity in an adverse sense.

PN1080

There are three other micro economic areas which the Commonwealth addresses. The first is, it says that growth in low paid occupations is low. As we pointed out in our reply submission, that seemed at odds with some research of Borland, Gregory and Sheehan, which said that growth in jobs which had low earnings as distinct from occupations was, in fact, the predominant area of growth in the Australian economy through the 90s. In the end the Commonwealth say, well, there is not really an inconsistency between those two things because we looked at occupations and Borland, Gregory and Sheehan looked at jobs. Well, I think, at best then that area of the Commonwealth's submissions is, to say the least, inconclusive.

PN1081

The refer to the impact on small business. At the end of it really their submission in relation to small business is that small business is less optimistic about the prospects of the Australian economy than everybody else. They do not say they are pessimistic and they do not say that they are not expecting things to go well. They just say they are less optimistic than everyone else based on a couple of surveys.

PN1082

Then they conduct, in their original submissions, an extensive analysis of various regional factors in relation to employment and the like. And we pointed out in our reply that there is simply no regional data on award dependency. So the extent to which you can analyse any of that is very limited. In the end they concede that but say, well, we still think that there will be a bigger impact in some regions. Again, it does not take the Commission very far.

PN1083

So in that context, if the Commission pleases, we started by saying three things, and we think that each of them is clearly demonstrated. We think we have demonstrated demonstrated need for the low-paid. We think we have demonstrated buoyant economic conditions. And as we have said this morning, we think that outside of this place all of the other main parties are saying exactly the same. And we think we have demonstrated a negligible economic effect, and as we have pointed out in our submissions this morning, properly analysed that is what the Commonwealth is saying as well.

PN1084

Before I sit down there is one matter which I wish to go to. There is an element of artificiality about the way in which argument in these cases is conducted. We contend for our claim and the opposing parties contend for their various positions. The figures for which each of the parties contend are subject to exhaustive, and the Bench might say "exhausting", analysis. But each year in the past the Commission has awarded an amount or amounts for the safety net increase which fall between the positions of the various parties. And those amounts have not been the subject of much real consideration in the proceedings themselves.

PN1085

I want to subject some mid-range figures to scrutiny. And I do so, let me make it clear, absolutely convinced that the evidence establishes the three propositions which I opened with. Absolutely convinced that the evidence warrants the grant of our claim. But in light of the history of outcomes in these proceedings it seems incumbent upon each party to address more than just their own position and those of the opposing parties. For the purpose of this part of my submissions I want to make two assumptions. First that the Commission will award, as we contend, a flat dollar increase to the award rates. Second, and perhaps a more modest assumption, I want to assume that the Commission will award a dollar amount and not so many dollars and so many cents.

PN1086

On this basis any amount $15 or less should be ruled out immediately. In real terms $15 or less is less than the increase awarded last year, one should convert last year to a flat dollar amount, and less than the increase awarded in 2000. An increase of $15 or less actually results in less wages growth than last year's decision did. Given the change in economic circumstances it is, in our submission, inconceivable that the Commission would consider an amount which, in effect, awarded less than last year's decision.

PN1087

$16 is also not an appropriate number, in our submission. A $16 decision is as table R3.2 shows effectively a no changed decision in terms of economic impact. We are talking about an addition to wages growth of .01 for $16. The position of the low-paid demands change and the circumstances of the economy permit it. Last year the Commission's decision specifically referred to economic uncertainty and a weakening labour market in awarding the amount that was then awarded.

PN1088

Those factors acted as constraints on the awarding of a higher amount. This year the Commission makes its decision in a different environment where those constraints are not present. In our submission, the rationale for awarding a flat dollar increase is that within the parameters of an average increase consistent with community wage movements the Commission could award more to the low-paid, a flat dollar increase should not be cover for awarding an increasing vaguely in line with community wage movements at the bottom end, and less for people moving up the award rates spectrum.

PN1089

A $16 wage increase fails this test. Even on the most conservative comparison using the wage cost index as the comparator, a $16 increase leaves about 80 per cent of award workers receiving less than 3.4 per cent, which is the current level of the wage cost index. On the most conservative comparison the lowest dollar amount that the Commission can award for an average outcome consistent with that wage cost index figure is $18.

PN1090

Now, of course, we say the Commission should not be using the wage cost index as the comparator. But using precisely the same methodology as in reply composite exhibit tag 3 you can calculate that an $18 increase is an average increase of between 3.3 and 3.5 per cent depending upon which cohort you use. That is, bang on the current wage cost index figure. So $18 is the first figure you get to if you use the worst comparator for community wage movements.

PN1091

Now, we have said the better comparators are either the AWE series or earnings on a national accounts basis, and it is on that basis that we contend for our full amount. And we also observe that aggregate figures should exclude for these purposes award only figures. But even on the most conservative basis $18 is the first number which meets what we say should be the rationale of a flat dollar increase. For $18 the increases at C14 and C10 are modest in percentage terms, respectively 4.4 and 3.5 per cent, and the economy wide impact would be less than .05 per cent net addition to economy wide earnings.

PN1092

The needs of the low-paid more than justify a $25 increase, and in our submission buoyant economic circumstances and negligible economic effect permit it. And so in that context it may seem odd to focus attention on a $2 difference between $16 and $18, but for the low-paid every dollar counts. So in these proceedings $18 should be the new floor. It should be the floor which others parties contend, and in respect of which the debate should be focused. 18 to 25. We say on the basis of a proper assessment 25 is made out, but let them not contend for their absurdly low propositions without first addressing why 18 should not be the floor in these proceedings. If the Commission please.

PN1093

JUSTICE GIUDICE: Thank you, Mr Watson. Mr Martin.

PN1094

MR MARTIN: If it please the Commission, yesterday I announced an additional appearance for the State of South Australia which joins in the written submissions already filed. And I would ask that they be marked.

EXHIBIT #M1 JOINT SUBMISSION OF THE LABOR GOVERNMENTS DATED 08/02/2002

PN1095

MR MARTIN: Thank you. The position of South Australia is, as the Commission would be aware, one of recent change in Government. As a result there was insufficient time to add to the written submission the overview of economic circumstances for that state. With the Commission's leave I propose that an overview similar to that provided by all the other states and territories be added. And if we could have leave to do that by Friday week, and perhaps that document could then form part of M1.

PN1096

JUSTICE GIUDICE: Yes, well, in the absence of any objection to that course, that is appropriate.

PN1097

MR MARTIN: Thank you. The States and Territories - - -

PN1098

JUSTICE GIUDICE: I am sorry.

PN1099

MR MURDOCH: Except, your Honour, the case is over then and one would at least need to give leave to the other parties to respond in writing to it, if the need arises.

PN1100

JUSTICE GIUDICE: Yes, I do not think there would be any problem with that, Mr Murdoch.

PN1101

MR MARTIN: Given that there has been no response to the overview with respect to any other state or territory it is unlikely.

PN1102

JUSTICE GIUDICE: I think you are tempting fate, Mr Martin.

PN1103

MR MARTIN: I always enjoy tempting Mr Murdoch. Your Honour and the Commission, the States and Territories of Australia support the application by the ACTU and adopt the submissions that have been made in writing, that have been made yesterday and today by Mr Watson. We only wish to make submissions on a limited number of matters and they are the submissions which have been made in writing with respect to the so-called incentive to bargain. The submissions have been made with respect to the use of the tax transfer system as an alternative to an increase sought by the ACTU, and the proposals which have been put forward by the Commonwealth with respect to the wage fixing principles.

PN1104

On the first of those matters, that is the incentive to bargain, there are two aspects which run through the submissions made by the Commonwealth. The first is in relation to the claim itself and the second is in relation to the wage fixing principles. I will come to that second aspect later. Members of the Bench would have seen in the preliminary statements made by the Commonwealth that they approach this issue on an unusual basis. The first is that their proposition is to be found in paragraph 1.10. I do not need to take you to that, it is merely their general submission. But even in that paragraph one finds an error in that they refer to wage fixing principles limiting the role of the safety net to employees who are unable to make agreements.

PN1105

It does not do that, of course. Principle number 1 makes it clear that the role of the award safety net and any adjustments to it is wider than that and refers to employees who may be unable. The Commonwealth then equates those unable to make agreements as being those employees who are in low skilled occupations and at lower classifications in the award system. As a matter of logic it does not follow.

[12.36pm]

PN1106

It is an argument that need not be pursued in these proceedings, but it demonstrates that their view, as expressed throughout their submissions, is that those unable to make agreements are confined to the lower end of the employment ladder so far as wages are concerned. The other aspect of their argument on incentive is with respect to capping any rises at C10, and they argue that that is necessary in order to maintain the so-called incentive.

PN1107

Their major argument on this point is found in chapter 8, and in chapter 8 one sees not an exact replication of what was argued last year or the year before, but a very similar argument to that which has been placed before the Commission on a number of occasions and has been rejected on a number of occasions, most recently at last year's decision in paragraphs 137 through to 140.

PN1108

Notwithstanding the rejection, the Commonwealth makes the submission again, and reminding one of George Santiana's epigram that those who do not learn from history are doomed to repeat it, they repeat again in this year's submission. The error which is evident throughout the submission is that they overlook one important aspect for the very existence of the award safety net, an aspect that was recognised in the decision last year. And that is that the safety net is to act as a benchmark for the no disadvantage test.

PN1109

That omission to recognise that important role is combined by the Commonwealth's apparent refusal to accept the requirement in the legislation that the awards act as a safety net of fair minimum wages. Those omissions then lead to the erroneous conclusion that they again put forward and results in their argument that the way in which incentive should be increased is to deny any increase to those at C10 or above and by having a reading of the statute which does not stand scrutiny.

PN1110

And we say it does not stand scrutiny because the award safety net is not designed simply, as they would say, to focus on the low paid. It deals with more than just pay, obviously. The reference to the low paid occurs only when one is considering a change to the safety net when one is adjusting it. However, the argument for the Commonwealth is - and they use the words `inevitably', they use the word `requires' - they say it inevitably requires that those on C10 or above are ineligible, ineligible for any increase in rates.

PN1111

Now, that is something which simply cannot be drawn from the legislation or the principles or previous decisions of this Commission. It is argued at paragraph 8.9 of the Commonwealth's major submission that they quantum sought by the ACTU would reduce incentive. It would follow from that that the quantum sought, being $25 a week, would in the case of Elizabeth Neville, one of the persons who has provided an affidavit for use here, if she was to receive the net increase of $20 a week, net after tax, her hunger to bargain would be sated because she could pay off the fine she incurred because she could not afford to pay her car registration.

PN1112

It would take her six months using all of her $20 net increase to pay off the fine, but she still would not be able to pay the registration of her car. It is difficult to see when one imputes into all of the figures put forward by the various deponents to affidavits, how any of those people are going to be satisfied that they need not seek better conditions by way of bargaining.

PN1113

The Commonwealth persists, we submit, in a view that an increase of the type sought by the ACTU which for many would only work to slightly decrease a crushing debt burden, would actually lead, in the Commonwealth's view, to the low paid becoming fat and contented and unwilling to do anything to improve their position. Because it follows from their argument that those at C10 and below will if they get more than $8 net a week in the pocket just lie back like sleek otters doing nothing but cracking crabs on their chests and enjoying the sunshine.

PN1114

Nothing could be further from the truth. Nothing could be further from the situation put forward by the many deponents whose evidence is unchallenged. $25 gross a week will not lead employees who are working at minimum award rates now into any state of torpor likely to lead them away from the grail of bargaining which shines in the Commonwealth's submissions.

PN1115

It is an article of faith for the Commonwealth that this must be true. They say it every year and because for them it is an absolute truth, it needs no evidence, in their view. One would have thought that by now the Commonwealth or other people who supports the Commonwealth's view would be able to present compelling evidence that the figures or the amounts that have been given in previous years, all of which were said to inevitably lead to people sitting back and not wishing to bargain. One would think there would be evidence of that. One would think that you would get more than just the survey that the ACCI put out, or rather, refers to whereby they say their members are concerned. One would think that you might have some evidence from people who have said, yes, after getting $13 a week gross last year I was so happy I didn't want to do anything else. None of that comes forward. And the reason, we suggest, is that there could be no such evidence.

PN1116

VICE PRESIDENT McINTYRE: Excuse me, Mr Martin, I would be interested to hear by those bus drivers employed by your client, the State of Tasmania, have been unable so far to achieve an enterprise agreement covered by an award.

PN1117

MR MARTIN: Your Honour, I will attempt to find out why. I cannot say now.

PN1118

VICE PRESIDENT McINTYRE: No.

PN1119

MR MARTIN: The argument that is put forward by the Commonwealth also takes a different view of the legislation from that which the words of the legislation portray. They use the word `incentive' which does not appear in this part of the Act. They appear by their arguments with respect to the capping and so on in the lower increase, they appear to have mistaken the word `encourage' in section 88AD with the word `coerce', because the Act only requires this Commission to exercise its functions and powers to encourage, not to compel, not to coerce, not to make it so difficult for people that they have no choice, but to encourage.

PN1120

The second submission that we wish to make is with respect to the argument put forward about the tax transfer system. We accept that a wage increase of the type sought - in fact, almost any wage increase - is a blunt instrument with respect to the types of problems which have been examined in the last day or so. Sometimes blunt instruments are needed. The tax transfer system is, notwithstanding what is said, similarly a blunt instrument.

PN1121

More to the point, what is the most - what is more effective is a sensible mix of wage increase and tax transfers. Now, of course, this Commission can do nothing about the matter. Nothing is suggested by the Commonwealth that there will be a change in the near future or for the live of whatever increase might be ordered to the tax transfer system. So that this Commission is confined simply to dealing with the application for an increase.

PN1122

We accept that the tax transfer system is not the sole answer, either for those above C10 or below it. And we say that there are two very broad reasons for not accepting that the tax transfer system is the sole, or even the majority answer. The first is that the allowance system provided by the Commonwealth Government is in most instances means tested to some extent or other.

PN1123

The result is that a person, say, earning - let us look at a tax break, the tax mark of $20,000 a year. For every dollar over that the person is taxed at 30 cents in the dollar. There are allowances, which that person might be entitled to received, which reduce by 40 cents in the dollar for every dollar over 20,000 in income. So that an increase in wages does not necessarily mean that there will be the same net increase in disposable income or available income.

PN1124

To take that simple example, a dollar in income over 20,000 means that you receive 70 cents in the hand after tax. Because the dollar of allowance is reduced by 40 cents, say, you are receiving only a $1.30 as a result of your one dollar increase. So whereas before you were receiving a dollar allowance, now you are receiving $1.30. So that while there are benefits in utilising tax transfer to focus in on some areas, it is not the whole or even the majority answer.

PN1125

The second reason why there should be an increase in the wage is the obvious one. Over time there is an increase in productivity. No one argues that over the long term productivity of employees increases. A failure to recognise this in a consistent and meaningful way means that the increases in productivity will only be recognised in profits going to employers, rather than any return to employees. May I now turn to the proposed amendments to the wage-fixing principles sought by the Commonwealth.

PN1126

JUSTICE GIUDICE: Yes, Mr Martin, that is a convenient time. We might adjourn now until 2.15.

LUNCHEON ADJOURNMENT [12.50pm]

RESUMED [[2.18pm]

PN1127

JUSTICE GIUDICE: Mr Chesterman.

PN1128

MR W.J. CHESTERMAN: Your Honour, perhaps if I could just make a couple of comments. Mrs Yilmaz from the VACC in an appearance last December on behalf of the VACC and other motor trades associations, she will be unable to do the submissions, so I have been delegated to take her place. If the Commission pleases.

PN1129

JUSTICE GIUDICE: Yes, thanks, Mr Chesterman. Mr Martin.

PN1130

MR MARTIN: Thank you. The final part of the submissions we wish to make concern the changes sought by the Commonwealth with respect to the wage fixing principles. There are three that are sought. I only wish to make submissions with respect to two of them, because so far as the amendment sought to the special case principle is concerned, we adopt the ACTU submissions in their entirety.

PN1131

With respect to the amendment sought concerning economic incapacity, the argument for that starts at paragraph 9.10 of the Commonwealth's major submissions and they provide four reasons for their application. The first they say is that there has been a paucity of applications. The second is that the amendment will ease the procedural burden. The third is that the amendment will ease the evidential burden. And the fourth is that the amendment would acknowledge the needs of small business.

PN1132

With respect to the first reason, the paucity of applications, that has been met quite properly, we submit, by the ACTU. There is no evidence, of course, of anyone who has declined to make an application or who has felt unable to make an application because of what are called the procedural and evidentiary burdens. One might have expected that such evidence would be available if it existed.

PN1133

There is in the submission from the ACCI a reference to a survey of their members, but all that is capable of being brought from that is that a number of their members expressed an opinion to the effect that it might be too difficult. What I wish to do is to ask the Commission to examine these so-called burdens against what is sought which is an exemption from paying a fair minimum rate, a rate which is set after a process such as the Commission is going through now in which there is some rigorous examination of the capacity to pay generally.

PN1134

The changes sought then need to be examined against what is available to applicants under the Act at the moment. The procedural burden is identified as being the need to make an application under section 107. That is a burden of little weight. It is an application that could be made in writing which is something that is put forward as a means of alleviating the burden elsewhere, but it is an application which can be made in writing with the leave of the Commission.

PN1135

The evidentiary burden is overstated. The AHA in their submission in support of this goes into some detail at paragraph 33 of its submissions about this so-called evidentiary burden. The Commission will recall the principle at the moment requires that proof in support of the application be rigorously tested. The AHA claims, submits, rather, that such a statement affects the balance of proof.

PN1136

Paragraph 33 of the AHA submissions actually reflect a misunderstanding of the difference between the onus of proof and the standard of proof. Of course, the principle does nothing about the onus of proof. It remains where it should be. It may say something about the standard of proof, but it does not say anything that is so unusual or unacceptable that it needs to be altered.

[2.23pm]

PN1137

It is, as I said before, against a background of a decision made by a Full Bench of the Commission that such an application will be made and against which it needs to be tested. If one, for a moment, thinks about what occurs, for instance, in civil courts, where certain claims are made then the standard of proof, while the onus remains the same and the standard remains the civil standard, the courts will require a higher degree of intensity in the provision of evidence. The Briginshaw test. It is nothing more than that.

PN1138

So that when a claim is made under the principle concerning economic incapacity, it is made in the environment of a seriously considered decision by the Commission in which that particular aspect has already been given some significant attention. The Commonwealth also submits that there should be either an amendment to the principle or another principle dealing with applications by small businesses. None of the matters raised with respect to the problems that small businesses might face are matters which cannot already be dealt with using the provisions of section 111.

PN1139

All of the matters sought to be included in an amendment or a new principle are matters which can be dealt with by the Commission under its powers in section 111 to give directions as to the way in which an application might be made. All those matters can be dealt with without the need for any new principle or any amendment. Finally, the third matter sought to be amended or changed by the Commonwealth relates to an insertion into the first principle which would require the words "incentive to bargain" and so on, and reinforcing and so on be introduced.

PN1140

It is said in the Commonwealth's reply to the ACTUs reply that the principles at the moment do not give agreement-making the emphasis intended by the Act. That overlooks the obvious; that overlooks the fact that the Act has precedence over the principles, and the principles must be applied in the terms of the Act. There is, with respect, no need to repeat the injunctions in the Act again in the principles. And the proposal uses the words I have referred to before lunch, that is incentive and so. It wants words which are not found in the legislation used in the principles, words which, if they were to be the object of the exercise, words which could have been incorporated in the 1999 amendments to this section, but were not.

PN1141

The real problem which would arise from the insertion of the words sought by the Commonwealth is that it would introduce a gloss which is unnecessary; it would introduce words which have no cognate existence in the Act; it would provide uncertainty and allow for mere arid debate about whether or not one is complying with the principles or the Act in a certain application. Those, with respect, are the submissions which we wish to make on the matters raised in the other submissions of the parties.

PN1142

SENIOR DEPUTY PRESIDENT HARRISON: Mr Martin, I might be assisted if you would address the proposal by ACCI that the changes to the wage fixation principles proposed would have some ramifications for state wage cases and the way they normally proceed, and operative dates.

PN1143

MR MARTIN: The principles? I am sorry, I missed the first part of the question.

PN1144

SENIOR DEPUTY PRESIDENT HARRISON: I understand that it is said this relates to the change to the wage fixation principle that would allow safety net adjustments to be awarded operative from a date before the award is made, and it is said that there will be some downside for the way in which state wage cases proceed and the manner in which awards might be varied following those cases. Could you assist me on that? Do you have anything to say about that concern?

PN1145

MR MARTIN: I will. I am seeking the final part of my instructions, because I have all the relevant legislation relating to that from each of the states, but that particular point requires instructions that go beyond the mere legislation. Could I answer that in writing? It will be very brief, I expect, and I would hope to be able to do it by the middle of next week, prior to the date that this case is due to end at any rate. But I am not in a position to answer completely today. Your Honour Vice President McIntyre asked about the man in Tasmania and my instructions - - -

PN1146

VICE PRESIDENT McINTYRE: And his employer.

PN1147

MR MARTIN: Yes. Well, I am not even sure about that. My instructions are clear; the earliest we can speak to any person who knows anything is 3 pm today. So could I get those instructions and provide you with an answer before the close of the Commission's hearing today?

PN1148

VICE PRESIDENT McINTYRE: Thanks, Mr Martin.

[2.30pm]

PN1149

MR BARKLAMB: Thank you, your Honour. Before commencing, could I seek, your Honours, Commissioners, to have our previous submissions marked as exhibits, if that is appropriate. There are two, as I recall it: what I would refer to as our written submission of 1 March and the reply submission of 28 March.

EXHIBIT #ACCI2 SUBMISSION OF 01/03/2002

EXHIBIT #ACCI3 REPLY SUBMISSION OF 28/03/2002

PN1150

MR BARKLAMB: Thank you, your Honour. I might just indicate that Dr Kates has an additional composite exhibit which he will tender after I make a short opening to our submission.

PN1151

JUSTICE GIUDICE: Yes.

PN1152

MR WATSON: Just to put my friend on notice, we did put some reasonably strict boundaries around the tendering of material subsequent to written replies and we have not had an opportunity to see what is proposed to be tendered. We may not have any particular problem with it but it would perhaps assist proceedings if we could see it and form a view before it is proposed to be handed up.

PN1153

MR BARKLAMB: Your Honour, I might, in turn, being able to assist my friend. That is merely a composite of material that has already been appended to our submissions. It is, in fact, part of ACCI2 and 3 in an order to assist the Bench, as I understand it, as Dr Kates will go through it.

PN1154

JUSTICE GIUDICE: Yes.

PN1155

MR BARKLAMB: If the Commission pleases, Australian employers seek an economy in which real wages are high and continue to rise but in an affordable and non-inflationary way, and in which low rates of unemployment become the norm. That means an environment which is conducive to allowing employers to do what we do best, growing our businesses and creating jobs. It is for this reason that employers oppose not just the quantum of the ACTU claim in this case but also its breadth. It is difficult to see real merit in the union claim, we say.

PN1156

Granting the increases the ACTU seeks will slow growth, reduce investment, increase inflation, add pressure to interest rates and add to unemployment. To the extent that it lifted wages of those on low pay, it would also ensure that many of those currently working have their job security weakened. It is clearly, we say, an excessive claim. It would increase the minimum wage by 6.1 per cent. Inflation is currently at 3 per cent. At the low end of the wages system the ACTU claim, we say, is, therefore, well above the CPI.

PN1157

One of the features of the Australian economy over the past decade has been the difficulty in generating sustainably higher levels of employment. What has been evident has been the difficulty in translating economic growth into labour market growth and achieving a structural reduction in the rate of unemployment. Our concern is that even during those periods when economic growth has been strong, the rate of jobs growth, especially for full-time jobs, has continued to lag. Businesses choose to expand their operations while remaining cautious in their intentions to hire.

PN1158

The industries where expansion has been most pronounced have been in the less labour intensive parts of the economy and as if to underscore the magnitude of the problem in the labour market, we say, the actual number of hours worked by employees across the Australian economy has declined over the past 12 months. Part of the problem has been the manner in which interest rates have been continuously adjusted to slow activity. Given the manner in which monetary policy is conducted, it has become more difficult for firms to make long term commitments to their employees, we say.

PN1159

With another rise in interest rates seeming always just around the corner, there are ever-increasing cost pressures on employers. Also contributing to this problem has been the increasing prominence of the safety net. Award minima continue to rise in a substantial way on an annual basis. The ACTU argues that the increase in costs as a result of granting its claim would be an addition of .2 per cent to the cost of labour. That is, the ACTU argues that an increase of 6.0 per cent on the minimum wage - and pardon me just for two seconds. I think I previously said 6.1. I understand it is somewhere in the region of 6.05.

PN1160

The ACTU argues that an increase of 6.05 per cent on the minimum wage or 4.9 per cent of the C10 level would lead to an increase in the cost of labour across the economy of only 0.2 per cent. We say this is a serious underestimate of the cost of the claim and of its impact. Our assessment is that the addition to costs across the private sector would add between 1.3 and 1.7 per cent and we say this is significant. The ACTU claim would also put immense pressure on Australia's rate of inflation.

PN1161

In an economy that is already struggling to keep the inflation rate within the Reserve Bank's 2 to 3 per cent target range, this would surely, we say, tip the balance. The effect of the increase in the price level on interest rates would be certain, just as certain, we say, as the effect of interest rates on the economy generally. Fewer workers would be employed. This would occur in an economy in which it is extraordinarily difficult to raise prices and in which it is, therefore, difficult to cover the increased cost of labour.

[2.36pm]

PN1162

We are only just, your Honours, Commissioners, coming out of a period of economic difficulty. Indeed however one assesses the state of the Australian economy, we say it remains true that even in periods of growth it is possible to make decisions that damage employment and business viability. We disagree with the ACTU about many things, but the one thing we say all parties should be in complete agreement on, is that if an increase will lead to a fall in level of employment, relative to the level of what would otherwise have been, then that increase should not be granted.

PN1163

There is, in our submission, an alternative to the untargeted and costly approach pursued by the ACTU. The appropriate means for establishing and then adjusting the safety net is to use the approach the ACTU itself has so often cited when discussing other economies overseas. It is to adjust only the minimum wage, which then becomes we say, the true safety net rather than adjusting all minimum award rates throughout the entire award rate structure.

PN1164

We note, your Honours, Commissioners, that the ACTU case is inviting the Commission to be bullish when it comes to awarding wage increases. It does this by portraying last year's decision by the Commission as overly cautious. We say the ACTU is wrong on both counts. That the ACTU sees the need to urge the Commission to now, in effect, throw caution to the wind in order to grant its claim, actually illustrates we say the excessive nature of its claim.

PN1165

It is not the Commission's role to be bullish, we say, it is the Commission's role to be responsible. Last year's decision awarded increases which, at page 45 of your 2001 decision, were described by the Commission itself as, "substantial at the lower level." And on top of, "significant increases in the previous year." We say this is hardly the language of a timid approach to central wage fixation by the Commission. Of course the Commission has to consider the economic circumstances as they prevail at the time, and the December 2000 quarter, December quarter 2000 national accounts, rightly gave cause for concern on the last occasion.

PN1166

But it is not correct for the ACTU to assert, as is implied in its case, that a higher wage increase is justified on this occasion because, unlike the previous year, we have not had a quarter of negative growth as was the case in the December quarter 2000. We say a proper reading of last year's decision clearly shows that the Commission did not give excessive weight to that factor. Indeed it essentially looked beyond that one quarter and identified underlying growth and was motivated by that fact.

PN1167

Under the heading, your Honours and Commissioners, last year decision on the ACTU wage claim which appears at paragraph 142 of the 2001 decision, the Commission stated:

PN1168

The December quarter 2000 national accounts also give cause for concern, particularly the growth statistics. Nevertheless we have given weight to the predominant view among the parties, that because of the underlying strength of the economy growth will recover during the course of 2001.

PN1169

The invitation by the ACTU for the Commission to be bullish with wages policy is an invitation to enter a pathway characterised, we say, by risk and irresponsibility. It is a submission that is understandably of real concern to our members and private employers generally. We are not dealing here with abstract concepts of bullishness or bearishness, but with real jobs, real incomes and real businesses. What we say is that the Commission in these cases ought to adopt a moderate approach, because the moderate approach is the responsible approach and moderation is justified because the circumstances of employees affected by the decision differ as do the circumstances of employers.

PN1170

For a moment let us move our focus briefly in this introduction from the abstract to the practical. We must bear in mind that this will be a mandatory decision, with the force of law, having an effect, subject to any contrary orders across multiple industries, in cities, regions, rural areas, to firms whether large, medium or small, some of which are well established longer term businesses while others are new or struggling. It is not a decision made at the workplace level taking into account local or enterprise specific factors, but a global decision at a centralised level.

PN1171

It is a decision that not only would increase the direct wage payable by an employer to an employee, but a decision, your Honours, that also increases on costs, superannuation payments, workers compensation premiums and payroll taxes to mention a few. The cost impact to employers of these decisions, your Honours, Commissioners, is greater than the benefits received by employees. In this vein we note that a very real relevance to this year's case is the fact that the payroll cost of employment is already said to increase by 1 per cent from 1 July as a result of occupational superannuation legislation. We say that is a significant matter which must be fully taken into account.

PN1172

Decisions in these cases impact not for one week or for one period of time. Once wages are increased they are generally increased for all purposes and are therein payable week in, week out, in benign or hostile trading conditions. And it must be borne in mind that they act as a starting point, the launching pad for future claims whether in a centralised sense or in a bargaining sense. Given these inherent characteristics of this case, we say, as I have already said, the moderate approach is the responsible approach.

PN1173

There is also another practical consideration. In listening to the ACTUs submission one almost gets the impression that there is a pool of money out there with a sign on it saying, available for the national wage increase, and that the debate here is about how to divide it up and how deep we should dip into it. The fact of the matter is that the funds that will be used to pay any increase are funds that are being used, and would otherwise continue to be used by employers to do other good and positive things, such as growing the business, reinvesting in equipment and technology and know how, searching for new markets, reducing debt, and most importantly, in employing people.

PN1174

It is not simply a case of dividing up available funds, the more that is required to be put into wages the less that is available for these other purposes. What is taken for one purpose is denied to another. Again, we say the moderate approach is the right approach.

[2.42pm]

PN1175

Adjusting only the minimum wage and not all award minima would raise wages, but we say without the harsh affects on employment inherent in the ACTU claim. It would protect the low paid with far less impact on jobs. It would assist in growth by putting less pressure on costs, on the price level, and on the rates of interests. Raising only the minimum wage would in other words provide a proper safety net we say of the kind we believe is intended by the Workplace Relations Act. It would provide fair minimum standards, it would take into consideration prevailing economic conditions, it would promote higher employment, and it would be targeted at the low-paid.

PN1176

ACCI's proposed level of increase would ensure, based on a 38 hour week, that all adult federal award covered employees are paid at least $11.14 an hour. $11.14 an hour. By raising the minimum raise from 413.40 to 423.40 it would see this Commission set its minimum wage at almost exactly 50 per cent of ordinary time earnings, which in November 2001 stood at $849.90. That is 50 per cent of average weekly ordinary time earnings.

PN1177

It would also see this Commission set its adult minimum wage at over 70 per cent of medium earnings which were estimated at $601 a week in August 2001. We say, in closing this opening submission, the ACCI proposed minimum wage would maintain an appropriate wages safety net for lower paid award employees. The ACCI proposal would also mean a $74 per week increase in minimum wages since 1997. That is $10 plus $14 plus 12 plus 15 plus 13 plus 10. $74. This would be an overall increase of 21 per cent since 1997. That is an average rate of increase of 3.3 per cent.

PN1178

If the Commission pleases, this is what we urge as the responsible approach, and on behalf of private employers, which at the end of the day is the party that carries the cost burden of any increase that is ordered, we urge the Commission to make orders in the terms we propose. I will now hand over, your Honours, Commissioners, to Dr Kates to commence submissions in chief.

PN1179

DR KATES: If the Commission pleases. I would like to begin by tendering a document which has new material, as we heard before, but is merely just for the convenience of following the submission be able to ..... the exhibits in turn. So I tender this document.

EXHIBIT #ACCI4 DOCUMENT

PN1180

JUSTICE GIUDICE: Yes, Dr Kates.

PN1181

DR KATES: Thank you, your Honour. If the Commission pleases, the Australian economy is in recovery and conditions are improving. But in discussing the state of the national economy we would begin by noting that the level of activity in many important areas remains below the level that had been achieved up to something like a year and a half ago. The proper approach to current conditions and to the improved prospects for growth is one of cautious optimism. It would be far better to be looking back over a prolonged period of improvement than one in which economic conditions are only just turning up.

PN1182

The ACTU this morning noted that the economy has been picking up, is moving ahead, and it is cited our own surveys and other surveys. And I would say in regard to that, that what we are talking about is not so much such a fantastic rate of growth that all of go, well, this is just a continuam of what has been happening before, but it is to a very large measure an indication of the relief being felt by many of those who thought things at this stage were going to be a good deal worse than they are.

PN1183

What we are looking at is an economy that is not buoyant relative to what the conditions were two years ago or three years ago, it buoyant relative to the conditions that people expected they would be like when we were looking at the economy one year ago during the time we were doing this wage case. Our expectation is that growth will continue. Our surveys do show it and they indicate that if economic conditions are allowed to mend, if we do not see increases in interest rates, if we do not see excessive increases in wages, if all of these things are allowed, if the economy is allowed to move forward at its appropriate pace, then we do accept that the economy will continue to grow.

PN1184

The ACTU talks about a number of what they think of as old and outdated assessments of Australia's economic growth. Mr Watson mentioned it this morning, that he referred to these quotations that they had highlighted, we highlight back at them. And I think, again, we would like to go to those quotations, because I think they are not old and outdated. They actually, irrespective of what happened to the national accounts in the December quarter, they remain as relevant now as they did then. The first of ACCI citations the ACTU chose to quote read as follows:

PN1185

Yet whilst acknowledging that the economy is moving forward it also remains equally true that it is performing well below its potential.

PN1186

That is from us. Then it quotes us as saying the following:

PN1187

The recovery is minimum and at an early stage.

PN1188

And finally it cites the following paragraph as somehow no longer of relevance in the economy today, and again I quote their except from our submission:

PN1189

The aim of policy must be to return Australia's growth rate to a sustained rate of increase of more than 4 per cent. The kind of rates which had become almost routine during the latter half of the 1990s. Such rates of growth are thus not an unrealistic aim for this economy but are the kinds of increase that ought to be the general aim of policy makers across the spectrum.

PN1190

Yet the data the ACTU itself presents which we believe show that rather than our data being old and unrelated to current circumstances, remain exactly and correctly the circumstances as we know it. If we turn to the first of the tables in the composite exhibit ACCI4. Again if you look at the table at the bottom, what you see is that there is an economy that had trailed down and gone down and bottomed sometime towards the end of last year and now has begun a slow but still incremental rate of growth back up towards acceptable and reasonable conditions.

PN1191

It is an economy that you would hardly describe as having returned to acceptable rates of growth, and if nothing else you cannot say that it has been a sustained rate of growth. At the very least we may have at the most three-quarters of what is good growth. We have not had anything like the kind of ongoing growth that you would like. Should we look for further evidence that the economy has not picked up. The second part of that section of that table, and you can see again that the unemployment rate, this is again from the ACTUs submission, the unemployment rate from 1991 to 2002, there is an upturn that has occurred. It has not been as bad a downturn as we have had in the past. It is an upturn. And if it may, it only just may, be beginning to turn back down. There is nothing in there that would cause us to reverse our judgment that the recovery is at an early stage, it has not gone very far, it still needs a lot more to make sure that it is sustained.

PN1192

We turn to discuss what they say about productivity. The ACTU makes much of the measured growth and productivity. On page 51 of its reply submission the ACTU notes that, and I quote:

PN1193

GDP per hour worked increased 1.7 per cent to be 5.0 per cent higher over the year, representing the largest quarterly and yearly increase on record.

PN1194

What is, in our view, truly astonishing about this is that not only does this supposed improvement depend on the fall in the number of hours worked, but the actual number of hours worked has been falling at an increasing rate through to the most recent quarter which we have data for, which is December 2001. In that quarter the number of hours worked across the economy had fallen by 0.5 per cent. Over the year hours worked had fallen across by 1.2 per cent. The recorded growth on productivity is thus based on what we have in the past described as spurious productivity which is the productivity which occurs not through the improved capital investment, not through the increased skills of the workforce, but through actual reductions in the number of hours worked across the economy.

PN1195

GDP, it is true, is measured to have increased by 3.7 per cent. The number of hours worked has also, however, measured to have fallen by 1.2 per cent. So what you have is a measure growth of productivity, the net movement between the rise in GDP and the actual fall in hours worked is an improvement in productivity of 5.0 per cent. And, in fact, what we find is that hours worked has been falling for six consecutive quarters. This represents a fall in 2.3 per cent in number of hours worked in the market sector over the last year and a half.

PN1196

And if I might, there was an article you may have seen in today's Financial Review which describes this on page 6 of today's Financial Review, and it is under the heading, "Slump in full time work." And it is an article written by Mark Davis. What the article, and I will quote it in full, and we will present the Commission with the entire study, we will tender it tomorrow. What it says is this:

PN1197

Australia's labour market slumped last year with full time jobs collapsing, average working hours falling to an all time low, and under-employment jumping dramatically recording to researchers at Flinders University. In an article published in the Australian Bulletin of Labour today the researchers Mark Culley and Phung Ngu said that deterioration in the job's market in 2001 was more severe than generally recognised because most commentators focus on monthly changes in employment. They argue that an analysis of the annual trend in a three key labour measures suggest conditions were worse than they had seen at the level of headlines statistics. While headline employment increased by 75,300 a surge in part time jobs mask the collapse in full time employment. Part time employment rose over the year by 135,100 while the number of full time jobs fell by 59,700. This was combined with the most significant indicator of a dampening in demand, a decline in the number of hours worked. Across the economy as a whole total hours worked fell by 1.6 per cent in 2001, a fall in average hours per employee from 34.6 hours a week in 2000 to 33.6 hours a week in 2001. The fall was a result of the shift to part time employment. A third indication of a slump in the jobs market was an increase in the level of so-called under employment to an average of 729,700 people in 2001. A 15.2 per cent increase on the previous year.

PN1198

And this just takes it to the end of 2001, the December quarter. You could hardly expect anything very significant has happened in the three months since then. Turning to another aspect of the ACTU reply to our submissions. We turn to look at the issue of private sector investments. The ACTU again quotes a number of statements from our submissions and these are found on page 47 of this reply. There is firstly the following except from the ACCI submission, and I again quote:

PN1199

Private investment remains weak. Although there has been a partial recovery in investment, particularly within dwelling construction, there is still no certainty that investment will accelerate towards levelled needed to raise living standards.

[2.57pm]

PN1200

The ACTU then quotes the following from the ACCI submission, and again I quote:

PN1201

For machinery and equipment, the largest category of private investment, the was again contraction in the real level of expenditure with a fall of 4.3 per cent recorded during the half year.

PN1202

And I end the quote there. And then there was this quotation from our submission:

PN1203

Private sector investment has been falling for the past two years. Although there is evidence that this contraction is about to be reversed, it has not happened yet. The upturn is still below a return to levels already achieved, ignoring the very weak investment position of the past two years and acting as if it is a clean sheet so that during every upturn we can forget the down turn that came before means we can take comfort in the growth rate without also looking at the levels.

PN1204

I think that is the key to all of the disagreement we have, or much of the disagreement we have with the ACTU. It is not enough to just look at the most recent growth rate, the last quote, the last half-year; you also must look at the levels. You have to see not only what is the growth rate in the December quarter and then say, well, we can wipe everything before ..... and say that that is all past. What you have to look at is the entire picture across all the period and particularly to see how are we doing relative to, say, a year ago, year and a half ago, two years ago.

PN1205

Because if, as is the case, we are not even doing as well as we did two years ago, then it is obvious that we are working well below capacity and that there is still much distance to travel before we get back to the kinds of output and employment and investment that we really are seeking in this economy and which we have demonstrated we can actually achieve. If one looks at the data on business investment, we can see this; well, we have had some return to growth over the four quarters to December 2001. The increase has been a very insignificant - this is for business investment - 0.1 per cent. And I would like to come to those data later on.

PN1206

The level at December 2001 remains 3.0 per cent below the level we have already achieved in June 1999. Between March 1993 and June 1999, the average annual growth rate in business investment had been 9.1 per cent per year. Had the growth rate continued as at December 2001, business investment would have been more than 22.7 per cent higher than it actually was. Instead we have a level of business investment lower than it had been in June 1999. Then there is monetary policy. Well, investment expectations are positive at this time.

PN1207

Never has it been, or seldom has there been a time when one would be more inappropriate to be counting chickens before they are hatched. A likelihood is that interest rates are about to rise, and the increases that are now being discussed even though it is true that we were spared one quarter anyway of an increase, but the increases that are now being discussed between now and the end of the current calendar year exceed one full percentage point. And there are many of us who are predicting and actually advocating higher.

PN1208

Now, if we could, in discussing this aspect, turn to the second chart in this composite exhibit, which is of our business barometer. There are a number of aspects in this that I think are relevant, and I raise it firstly under the issue of interest rates, because interest rates have been the single most important, but not the only, factor inhibiting growth and employment. But what this barometer is constructed from is from our own business surveys. We do three surveys. We do our ACCI Westpac, we do the survey investor confidence and we do the national survey of business expectations, and we sort of do this sequentially across each month of the quarter.

PN1209

We then take not the expectations data, because they are important, it is not the expectations but the actual data, what business are reporting is actually happening in their own firms at any particular time. We take the actual data and we turn it into a composite index of economic activity. And we have - and because the ACCI Westpac survey goes all the way back to 1966, we have been able to actually construct a single index of this kind that goes back now for 35 years. And what we find, firstly, is that if you look at the upturn which is the most recent, and that is in for the March quarter, so it is going past what we have for the national accounts, but if we look into the March quarter, it will be seen that the economy has continued to improve.

PN1210

It has, without doubt, continued to improve. But if you compare it with the middle of 1999, it is also equally clear that we have not yet begun - we have not even returned to the level of activity at the stage of in the middle of 1999. Now, I hesitate actually to use this barometer to measure relative intensity in the economy, but to some extent you can actually do that, if you see the various downturns, the barometer has been able to show the relative depth of different downturns. You can see the fall in activity in 1974/75. You see it again in 1982.

PN1211

There is another one in 1986/87, the downturn induced by the Reserve Bank in 1990. You can see the depth of that in 1991. You see the return to growth. It is not entirely designed to measure the relative intensity of economic activity, but it is not - it is also not without some ability to pick the differences between the strength of the economy at one time and another. So that what we are trying to say is yes, there is a recovery, yes, the economy is getting better, yes, things are picking up. But we are at the start. We have not even got back where we were in 1999.

PN1212

We are not yet where - anything like where we would want to be. And it is a worry to us, a serious worry, that we are looking at higher interest rates now before we ..... anywhere else. I would also point out, because this is why we consider the interest rate issue so important, if you can see that in terms of the peaks on the barometer, if you go back towards the first peak there, working from the right, at somewhere around the end of 1999, there is another peak somewhere at March 1994, March/June 1994. There is another peak somewhere round March 1989.

PN1213

It you look at those three peaks, they all have the same thing in common, and what they have in common is that those were the very quarters in which the Reserve Bank began to raise interest rates. Our concern with the way the Reserve Bank and what the Reserve Bank does and how it will affect growth, investment and employment is not misguided. It is the concern that we have because each time, each time that the Reserve Bank has tried - has put its foot on the brake, it has succeeded in slowing and in fact stopping the economy.

PN1214

We have only just missed a disaster here in Australia this year, because of, in our view, the tax reductions which just happen to coincide with the introduction of GST. It was not pre-planned to deal with a slowed down economy. It just so happened we had tax increases that kept the momentum of the economy going, that allowed consumer demand to continue, and that the effect of the higher interest rates in Australia was not zero, but it was less than it had been in economies overseas. That is why we are as concerned as we are that interest rates might be pressed up yet again. And then finally, I would like to just take the Commission, if I may, to table 5 of the ACTU written reply submission.

PN1215

COMMISSIONER LEWIN: Just before you do, is there some explanation of the barometer, the way in which it is composed in the material?

PN1216

DR KATES: Yes, there is, Commissioner. I will get you the reference to that. I will come back with a reference to that in a moment.

PN1217

COMMISSIONER LEWIN: All right.

PN1218

DR KATES: But if I could - this is table 5 in the - it is ACTU5 reply submission and it is the - sorry, ACTU6, and it is their tables, and it is the one that the ACTU drew us to this morning. It is - - -

PN1219

JUSTICE GIUDICE: Which page is it on, Dr Kates?

PN1220

DR KATES: Pardon?

PN1221

JUSTICE GIUDICE: Which page is it on?

PN1222

DR KATES: It is on page 7 of ACTU6, and it is the contributions to Growth Domestic Product. There are I think a number of conclusions we would draw from this table that perhaps the ACTU did not. What it was trying to say was, well look, you don't have to worry about dwellings investment because even if the - even if it happened to be less than it was, well, it will still be all right, it will - .8 will fall to .6. These figures are of course not growth rates; what they are is the contribution to growth.

PN1223

If there were no further growth in dwellings investment in any quarter, it would just become zero in the quarterly numbers. It would - if it became negative, it would actually be a negative number. But what is interesting, if you go to that final column, is the fact that the total private growth fixed capital formation across the year is 1.2 per cent. The movement, if you count first dwellings and then real estate transfer expenses, real estate counted for 1.1 per cent of the full 1.2 per cent growth.

PN1224

All the other aspects of private sector investment were minimal; they were trivial. They did not have any serious impact. If we are looking at where the economy is going, then you do have to worry that there is not at this stage - there may well be in the future, but not at this stage, any evidence of an improvement across the year in annual growth in investment. I also may note that next to that very article on the slump in full time work in today's Financial Review, there is another article, this one also by Mark Davis, and this one is about the housing industry and there it says - the headline is: Housing Boom starting to fizz.

PN1225

And what it says is the housing boom that had been boosted - has boosted the economy is running out of steam. New figures out yesterday show approvals for housing ..... are falling significantly. So that what the ACTU was saying to you in effect was, well look, just because the one area that we have had of good investment is about to run out of steam, do not let that worry you, just the fall in the actual growth rate will - it can easily be accommodated within the economy because of the past growth rates, not because of the next ones, but the past ones.

PN1226

Two other things I would mention on this table: the second is that the ACTU stated how the international circumstances of the Australian economy are not something that need trouble anyone; that things are getting better overseas and that there is not an awful lot of concern for us on that. Yet if you look at the December 2001 data for exports of goods and services and imports of goods and services, we find that exports fell by 0.3 per cent, or the contribution was 0.3 percentage points. And then it is less imports, so imports actually pulled it down further, so it is up 0.2 per cent. Net exports in the economy was minus 0.5 percentage points contribution.

PN1227

If we are thinking about keeping the momentum of the economy going and of keeping economic growth on a forward momentum, then the fact that the international situation is having an effect in Australia, it is affecting our exports, it should be something that the Commission is very mindful of, because without that continuation of export growth, we are not going to keep the economy moving along. There is then finally, I mention what is there as a statistical discrepancy, and that is that figure almost down the lower bottom right-hand corner.

PN1228

The statistical discrepancy actually is - it is the number that allows the two different ways of calculating national accounts to be reconciled, so that what you do is you find that over there, when the national accounts are estimated, there are three ways of doing it; when the other measures of measuring growth are calculated, you have a growth rate there of 3.7 per cent. Not on this table, not on these expenditure series, not from here. It is on another measure. What the statistical discrepancy does is take the expenditure data and raise it to the growth rate in the other estimate of GDP growth.

PN1229

So in terms of actually these components, the expenditure components to GDP, what you really have is not a growth rate of 3.7 per cent over the past year, but it is 3.2 per cent.

[3.12pm]

PN1230

Now, I know this is perhaps a bit abstract in terms of how national accounting data is calculated, but at the end of the day what the statistical discrepancy is give you an actual non-economic, just some really a statistical number to get the growth rate on this table up to the other growth rate calculated elsewhere. A true growth rate, the actual underlying growth rate in terms of these expenditure numbers, is 3.2 per cent.

PN1231

And I suspect that we would have had a very different feel and understanding of just how strong the economy is going if we had looked at - we had seen the growth rate was only 3.2 per cent. Then there is another set of data that I would just mention in a kind of abstract way, and they are the data that are not here at all. They are the ones, if you take the table out to the right, and they are the data for 2002.

PN1232

And in a sense this is what we might describe as the zone of the unknown, because we do not know what is going on out there. Last year when we were in this Commission we were looking at a growth rate where the economy had stopped. We had the most recent data was an economy that had actually had a fall in GDP, and the Commonwealth argued that we could look past that, the Commission accepted that we could look past that, that things were not that bleak, perhaps.

PN1233

We still think that on our view how things were and are, that the economy has lived up more or less to the kind of slowdown we expected of it. But that is another story. What is important here in looking forward to the right hand side of this table, is we do not know what in store for us in 2002, the rest of this year. We do not know what is going to happen with interest rates. We do not know the effect that interest rates will have.

PN1234

We do not know that whether the American economy will actually take off back into growth. We have no idea whether there is going to be further increases in oil prices because of tensions in the Middle East. There are so many unknowns sitting out there that we just simply cannot quantify. We can take guesses. We can make assumptions, but what we cannot do is know what is going to happen out beyond the data we have.

PN1235

And if there is ever any reason for continuing to maintain a growth rate in the cost of labour that is less than some kind of abstract maximum if you get the best of all possible circumstances, it is precisely the fact that we do not know looking forward what is going to happen. It is better to be a bit prudent and a bit - to keep the - to maintain a lower growth rate in the cost of labour because we are concerned that once interest rates do start to rise - d we do think they will start to rise - that all bets are off for both future growth rates in so many aspects of the economy, including the labour market and investment.

PN1236

If I could now take the Commission to the data we have on the economic indicators that we have that we provided, and these are the same indicators as we had. Now, despite there being a range of validly based concerns, it is accepted the economy is growing as we have said, and it is in contrast to the condition when the safety net was held last year.

PN1237

Yet in agreeing that the economy is moving, it also remains true that it is performing well below its potential. There are a number of factors that in our view had made the reasonably strong domestic growth rate possible, some of which are being experienced by Australia alone and which, therefore, separate us from other developed economies and amongst those factors which are common are the reductions in interest rates, which have lowered financial costs, that is here and across the world, and the fall in world oil prices which have led to a reduction in the price of petrol both here and across the world.

PN1238

But there are also factors that are relevant to Australia alone. The most important of these - again, I noted this earlier - have been the personal tax cuts which accompanied the introduction of the GST in July 2000. The second matter, and this is entirely unique to Australia, was the introduction of the first home owners grants scheme. If international recovery does occur sooner rather than later, there is every reason to hold that economic conditions here will continue to move forward and perhaps even at an accelerating pace.

PN1239

Yet there are genuine concerns that should be at the forefront of anyone contemplating an increase in the business costs at this time, and we will address this as much to the Reserve Bank and we perhaps do here in the Commission. The recovery is minimal and is at an early stage. The unemployment rate has gone up during the year. Most of the jobs, I am afraid, have been part time. Private investment remains weak.

PN1240

Inflation rate has now gone over the Reserve Bank's target range of 2 to 3 per cent which opens the possibility of higher rates of interest well before this economy has had an opportunity to implant genuinely self-sustaining rates of growth, and one still cannot take for granted a recovery in the rest of the world.

PN1241

It is in these circumstances that any decision in this case will need to be made. It is thus an economy in which decisions to raise the cost of labour must be made with genuine caution. The fact that the economy is on the mend cannot be allowed to cloud the facts of a very unsettled economic environment across the world. The time are such that a measured and conservative approach to an across-the-board wages policy is, in our submission, required.

PN1242

Since we provided our witness submission, there has been at the beginning of March there has been a good deal update on economic material published by the ABS. There was the release of the national accounts for the December quarter 2001, and there have been the publication of revised figures for the labour force. So that every year the ABS not just adds new numbers, but revises both the seasonally adjusted and the trend data and they come out in February. So we have updated our labour force figures as well.

PN1243

The new data which we have already tendered and we have reproduced here are shown and if we could we would just briefly like to take - go through some of these figures. First, the first table is that for gross domestic product, and this is the data in these tables are all where we can cut and calculate them. They are all done on trend basis because that is the, in our submission, the most accurate way to estimate the growth rates and movements between periods.

PN1244

What you see there is that the Australian economy has picked up, having slowed to a crawl at the start of the year - towards the end of the year 2000, there has now been over the past measured three-quarters, a return towards a reasonable rate of growth. During the period between March 2000 and March 2001 the aggregate growth rate across the year, as you can see in the final column, was 1.4 per cent. That was the year to March 2000.

PN1245

This the slowest growth rate since the recession of 1989-92 when the Australian economy had actually contracted. The figures on non-farm product are similar to those - that is in table 2 - that are similar to those found in table 1. The data on household private consumption in table 3, there is a household consumption, this is private household consumption, shows that across the year the growth rate has been 3.6 per cent and this is the strongest growth rate of - this is the part of the economy that has actually maintained the momentum of growth across all aspects of the economy.

PN1246

But if we could turn to the data in table 4 and I think this is where our differences with the ACT are particularly highlighted, and this is the data on private sector investment. What you see is that between - and looking down through the quarterly column, you find that the growth rate between June 2000 and March 2001 was negative in each of those quarters, that if we looked down through to March 2001 that they had actually fallen by 12.4 per cent across the period to that time.

PN1247

We now have at December 2001 a growth rate of 7 per cent and this is where the ACTU sees virtue. We have growth, 7 per cent, that if you look at the quarterly growth rates you can see that it is 3.7, 3.5 and 2.2, but the point we make is that if you look at the actual number, the actual level of investment which is in the figure given in dollar millions in the first column of numbers, you can see that in terms of the level of investment it is below the peak level that had been achieved back in March 2000.

PN1248

So that rather than saying we have an economy that is growing strongly that you can - that the 7 per cent growth rate in the last year is really terrific, you have to put it into context of the downturn. So that as we say it is as if you have fallen into a hole, then you have climbed up, and then when you get that level you look back down the hole and you talk about how you have been growing and coming up.

PN1249

What is, in fact, the case is that we are - and in fact this is shown very well on the diagram, the chart on the right - you can see the downturn there and you can see that we are coming back out of it. And the point we make very strongly is that we may have returned, we have a return to economic growth, to growth and investment. We may be looking at a better picture there, but it has not happened yet. And we are very much concerned to make sure that although it has not happened yet, that it does happen, and soon.

PN1250

We note that over the period between March 1993 and March 2000 the average aggregate increase, the average increase, the increase in aggregate terms between March 1993 and March 2000 was 71.3 per cent. That was an average increase of 8.0 per cent a year. Now, we look at a situation where between March 2000 and December 2001 we have actually had a decline. So that the kind of growth rate we had has simply stopped. You cannot think about that kind of growth.

PN1251

If we look at table 5. Table 5 is the one seriously hopeful aspect to the economy. But again we notice this is part of the zone of the unknown. It is out into the future. And what table 5 shows is that on estimate 1 - and it is difficult to read the table - but if we just look at the first of the figures there, on estimate 1 which is for 2002 to 2003 so we are looking - these are forecasts going into the future and forecasts are always very dangerous because circumstances change between now and then, but looking forward into 2002 to 2003 which is the next financial year, we may have 21.2 per cent growth in investment in the area of non-dwelling expenditure.

PN1252

Now, that is - that would be if it actually eventuated, a very important turnaround in economic circumstances. But the question is not - we are not in this case looking back. We are looking forward. We are looking towards what might happen in 2002 to 2003, if current plans are realised. That is, if the kinds of decisions that businesses are contemplating making actually do get made because the environment in which they are living in turns out to be the kind of environment in which they would be willing to make those kinds of investments. But nothing is yet written in stone. Nothing has yet happened yet. No decision, no actual - no bricks and mortar have yet been built in 2002, 2003. That is all before us. And while it is very - - -

PN1253

COMMISSIONER LEWIN: Is that right, though, Dr Kates? Is that right, though? I mean, surely business investment decisions often precede, for instance, in the case of non-residential dwelling, the lock-up of a building by a long period of time.

PN1254

DR KATES: Yes, that is true, yes, your Honour, I would not disagree with that.

PN1255

COMMISSIONER LEWIN: Well, is it true to say that every investment decision that is likely to be realised in the year 2002 is yet to be made?

PN1256

DR KATES: No, not that the decision may or may not have been made. The actual bricks and mortar have not been put in place, so that standing here in the beginning of the last quarter 2001-2002 nothing has yet happened in 2002-2003, nothing has yet happened. That if outcomes in the other aspects of the economy are actually constant with going ahead and realising those outcomes, then they may happen.

PN1257

But we are a long way between this estimate which was made in January and February already, so it is already two months, between what was - they thought they might do back in January and February and what they really will do during 2002-2003.

[3.29pm]

PN1258

COMMISSIONER LEWIN: We are in a situation where decisions of an investment are yet to be realised which have already been made based on business expectations which were accounted for in the early part of this year, is that not right?

PN1259

DR KATES: Well, one presumes that any investment that has actually been undertaken was a consequence of a decision that had been done prior to that, that is true, yes.

PN1260

COMMISSIONER LEWIN: Yes. So that the level of expectation for plans to invest as they stood in the beginning of 2002, would be very much based on the outlook for growth in particular markets or in the economy as a whole.

PN1261

DR KATES: Well, if I could just take you to, for example, the data for 1989 and 1998/1999 on this table. And as you can see for estimate number 1, the increase at that stage which is well before what went on, was 17.3 per cent. By the time you got to the next one it had gone to 10.7, and 9.5 and 0.6 and minus 2.3, then minus 3.0, then when you actually ended up at the end of the year, the outcome was minus 3.3. So that what people may think in January/February, the year before the actual financial year begins, is a very different thing from what they may actually end up doing.

PN1262

So that looking at 21.2 may end up being just as much of an example of that one was where 21.2 was a kind of brave expectation made by people early on, before they actually saw what the year was going to look like. But it may end up that even with the 17.3 or the 21.2 that when you actually look at what was realised at the end of the year, a very brave and optimistic estimate at the beginning, even before the financial year, may have turned into an absolute decline in a level of investment.

PN1263

And that is the point we are trying to make that nothing is yet written in stone. What we are trying to do is get an expectation that is being made realised. So rather than saying well there is no problems in front of us everything is just - we are on the straight run, the point we are trying to make is that the one area that we could actually point to where there is some reason for hope about the level of investment, is not something that you can say with any certainty will happen. These are statements made well before the beginning of the financial year and they are at the stage when it is typically the most optimistic in less and really gruesome years. In bad years people are typically more pessimistic.

PN1264

We are at a stage now, as the ACTU has even quoted from our business surveys, businesses are becoming more optimistic and so they are looking forward towards, perhaps this level of investment. But it has not been realised yet and as that example of 1998/1999 shows, that what people think in January and February, five months before the financial year begins, bears - often bears little relationship with what actually happens when the final story is told about that year. If I could just mention, Commissioner, that - - -

PN1265

COMMISSIONER LEWIN: Yes, I have read it, it is tag 2.

PN1266

DR KATES: You found it, that is good. That is good. If I could then turn to the data on dwellings investment, and that is in table 6. This has certainly been where we have had the most momentum in the private sector investment. The first owners grant scheme has been pivotal in turning the dwelling sector around, house construction has been pivotal. The last three quarters shown there, June/September/December of 2001 have had very strong growth rates, 6.6, 7.9 and 7.2.

PN1267

And at December 2001, the increase was 16.7 per cent over the previous year. But again it is one of those examples where the actual outcome at December 2001 is well below the peak outcome in periods before that. If you look particularly for March 2000, you will see that the level of dwellings investment is well below, well below what had occurred then. Now, to some extent - to an important extent, the growth rate that occurred up until say June 2000, had been artificial in its own way.

PN1268

It had been a product of the pull forward of dwellings investment so that there was a good deal of investment because of the expectation of what introduction the GST would do to the price of building construction. So there was an awful lot of dwellings construction pulled forward. Which is why there was a lull in the period afterwards. So that there was a pull forward and a lull afterwards, but given that we were coming back towards normal rates, and given that there was the first home owners grant scheme, we have had a very solid improvement in dwelling construction.

PN1269

It is not up to where it was and it is certainly below the capacity of this economy for dwelling construction, but certainly there is no question at all that it has been an improvement and one that we actually recognise that it has been instrumental in keeping the labour market and the economy generally on an even or more even keel than we might otherwise have had.

[3.36pm]

PN1270

But again the point we make, and it is very well shown in the chart, there was this huge fall and then a recovery. But the recovery has not even taken us back to the level of dwellings investment we had originally and previously achieved.

PN1271

SENIOR DEPUTY PRESIDENT WATSON: Dr Kates, do you not need to examine the cause of the decline. It is a similar timing in private sector investment as with dwelling investment, and there seem to be timing factors which might have distorted the figures, making them to be late '99, early 2000 figures unnaturally high. Factors such as the GST, factors such as the Olympic construction activity. So that you may well have a situation of a distorted and unrealistically high level in later '99, and then the converse effect of that timing effect and now a resumption of that growth.

PN1272

DR KATES: Yes, I would not disagree with that at all. I think that we have had for a variety of reasons, particularly for dwelling construction, for a variety of reasons we have had very artificial times. I am not sure that - I suspect that the Olympics had something to do with it, Olympic housing construction, whatever out there in Homebush, that there was the pull forward because of the GST and I do agree that in the period towards - heading towards June 2000 that you would be looking at the kind of growth rate in dwelling construction that is untypical, and that I would not want to argue that that was a particularly good growth rate.

PN1273

But if you take the figure just for September and that 7867 million, and then you look at that and you compare with June 1998, which is not a particularly distorted year, whatever, it is just simply a year, although there is no such thing as just typically a year. I think every year has its own characteristics. But nevertheless, in terms of the housing cycle, there is nothing, I think, that is particularly unusual about that time. And yet in September of 2001 we had this large growth rate, but it only took us back to a level similar to the kind of growth rate we had in September and December of 1998.

PN1274

So the point we are making is that when you have gone into a downturn, and you are coming back out of it, that the recovery, if you look only at the growth rates during a recovery you get a wrong impression about the overall strength of the economy. Because the most recent growth rate from a trough is not the best way to think in terms of what is the potential for the economy, how strongly can it grow, how much investment is there, what more can we do to actually get the momentum going in the economy. And I think here with the dwellings investment it is certainly true that there have been so many - so many extraordinary factors that are built into that.

PN1275

But at the end of the day it is one where you would not say that even looking at 16.7 per cent of growth rate over the last year, it is almost certainly a product of the previous decline and it has hardly taken the housing industry to the limits of its capacity. And on top of all of that there is growing evidence that whatever momentum we have had in the dwelling construction industry is dissipating and it is falling away, and that by the end of the current financial year that the momentum we have had, because of the first home owner's grant scheme and other reasons, will have gone. And that we cannot be looking at the dwelling construction area for further momentum in the economy looking forward into 2002/2003.

PN1276

JUSTICE GIUDICE: Dr Kates, am I right in assuming that the investment figures in tables 5 and 6, certainly in table 6, do not include any GST effect?

PN1277

DR KATES: Well, in terms of - well, certainly in terms of the volume there is the GST effect. Because they have effected. But in terms of the actual calculation of the growth rate there is no 10 per cent added.

PN1278

JUSTICE GIUDICE: No.

PN1279

DR KATES: There is no effect of that kind.

PN1280

JUSTICE GIUDICE: Yes.

PN1281

COMMISSIONER LEWIN: Could I just ask you about table 5 again, because I think I do not quite follow the table. It probably just needs a little bit of explanation for my purposes at least. Just take a sample, the year 1998/99 which I think is one that you referred to. Do I understand the estimate 1, you actually estimate the actual level capital expenditure in current prices to be $37.9 billion.

PN1282

DR KATES: Yes, that would be, as I understand it.

PN1283

COMMISSIONER LEWIN: And estimate 7, according to the legend, suggests that the actual capital expenditure in current prices was $44.6 billion. That is a higher number yet the percentage change is shown as a negative value. Could you just explain that to me?

PN1284

DR KATES: Sure, yes. This is a table that almost entirely should be looked at vertically and not horizontally particularly. The ABS goes out and it samples a number of businesses and it asks, what is your expected level of investment. And what it gets back are figures so that January/February you go around Australia, there was a total level of investment as at January/February, from all of these firms, looking forward to 2002/2003 came to that figure of $37.9 billion. But as you will - - -

[3.43pm]

PN1285

COMMISSIONER LEWIN: That was for 2002/2003, did you say?

PN1286

DR KATES: Well, yes, that is right. I mean, when we went in January and February of this year and they - - -

PN1287

COMMISSIONER LEWIN: No, I am sorry. Would you mind answering the question in relation to 1998/99.

PN1288

DR KATES: I was. I said 37,916. So that when they went and did - they surveyed businesses, they found that when they aggregated it, it was 37,916 but as you move towards the actual year, more and more firms come to start thinking about 2002 - or in this case, start thinking about 1998/1999. As you get towards it, more firms begin to think that there are certain investments that they will take. So that back in January or February they didn't know about - because they hadn't even considered them.

PN1289

As they got closer to the year, firms had taken on - made decisions so that, say when you got to December, some firms who had not thought the previous January/February that they would be undertaking any particular capital project in that year, did take it on. So that these numbers enter into the statistic. So that as you move from left to right you will actually find that the number tends to grow. The ABS, in publishing this table, publishes something with it called the realisation rates and what the realisation rates tell you is what is the growth rate.

PN1290

Given what you get in this particular estimate, which is in this case estimate 1, typically the final, actual outcome will be 20-odd, 25 per cent higher and they actually specifically state what the average growth rate is, the average final outcome, given the first estimate. So that is the realisation, what actually ends up being realised. So that there is an expectation as you move towards the financial year and then into the financial year that some firms who had not thought that they would be taking on investments do suddenly realise that they will, and they end up being incorporated.

PN1291

But the realisation rates always are built on the understandings that some of the investment will not be in the first calculation because firms don't even know that they are going to do it and so make the decision later on in the year. So that, moving from left to right, you will find the numbers get higher but the way to actually follow the table as to what will happen is to read it relative to the previous estimate. So in this case our estimate for 2002/2003 is to say that it is 21.2 per cent higher than the same estimate in the previous year.

PN1292

But to read from right to left, to say that the actual estimate and year - going back to 1989/1999, the actual outcome was 44,682 and that is 25 per cent or 20 per cent higher than the figure for estimate 1 in that same year. That has no economic meaning. It is just the typical way in which businesses make decisions as time unfolds and the fact that that grows, you will always expect it to grow. It would be an extraordinary year if it did not grow. The realisation rates are always positive from that point to that point.

PN1293

COMMISSIONER LEWIN: So should I conclude from this that the likely amount of capital expenditure in the year 2002/2003, on what you have just said, will be higher than the estimate? It will be higher than the level estimated in estimate 1.

PN1294

DR KATES: Yes, you would conclude that but that wouldn't tell you much about the growth rate you will have during the year.

PN1295

COMMISSIONER LEWIN: It would just tell us the absolute amount of capital expenditure will be higher than 39.3 billion.

PN1296

DR KATES: Even this number is itself just - it is a sample. So that when the ABS goes out and calculates the growth rate in GDP and in various aspects of investment, this is just a subset of that. This doesn't tell you all the aspects, not even of business investment. This is only a portion of it. So that the fact that this is higher doesn't - it gives you a sense of, an indicative sense of what the growth rate is going to be like but it doesn't give you an actual number for the growth rate. So that, for example, in 2000/2001 the figure shows a minus 7.3 per cent but if you look at June and if you go back to table 4, 2000/2001, the actual figure there is minus 9.5 per cent. So it is not the same.

PN1297

In the previous year it was minus 5 and, in fact, what you find there, it was a plus 5.2 on that table. So that it is indicative and it is sort of - it does give people encouragement that things might get better but it is not - in two ways you cannot just read it and say because we have that number everything is - investment growth is going to happen. It is only a sample. It hasn't been realised and, in fact, when you look at the fourth - the national economy and all investment across all aspects, it is only a very poor estimate of what eventually does take place in the economy.

PN1298

But it is, nevertheless, useful and the point we do emphasise is that our aim should be to make sure that what businesses are sort of indicating they may do is actually realised but it has not been realised yet and an awful lot will depend on what the Reserve Bank does and, in our submission, what happens in the safety net decision.

[3.50pm]

PN1299

SENIOR DEPUTY PRESIDENT WATSON: Dr Kates, can I take you to the graph of dwelling investment. That appears to show a cycle in dwellings activity, dwellings investment, going from negative growth, then a period of positive, negative, positive. It seems then to have been interrupted with a decline in growth in about mid '97 but never getting to the negative, suddenly a sudden upsurge, which seems to be the - - -

PN1300

DR KATES: Sorry, what was - I didn't hear the last bit.

PN1301

SENIOR DEPUTY PRESIDENT WATSON: The decline from '97, unlike the earlier downward cycles, doesn't get into the negative. It seems to be pulled up by what would appear to be the bring forward effect of the GST, which has the effect of exaggerating somewhat the decline and then there is, no doubt, the first home owners scheme and the recovery from an abnormally low level which resulted in that very sharp upward increase again. Is it possible to reach any conclusions as to the general direction, as distinct from the effect of those abnormal influences over the more recent period?

PN1302

DR KATES: I am not sure I understand. Sir, are we trying to draw what the cycle might have looked like if it hadn't been for the - - -

PN1303

SENIOR DEPUTY PRESIDENT WATSON: I am just saying can you do that in light of what seems to be a disturbance of a more regular pattern by this abnormal effect.

PN1304

DR KATES: I will have a look at that, yes. Yes, your Honour, I will have a look and see if we can do something on that.

PN1305

SENIOR DEPUTY PRESIDENT WATSON: And the graph of private sector investment again seems to show, at least in the 1990s, an abnormally sharp downturn as well.

PN1306

DR KATES: Well, I mean, it is - you can sort of see, if you see out to the left-hand side of that chart as well, the very powerful effects of Reserve Bank decisions that - - -

PN1307

SENIOR DEPUTY PRESIDENT WATSON: Perhaps you should send the Reserve Bank a copy of your submissions, Dr Kates.

PN1308

DR KATES: Well, I wish - we should do the same submission for them, I think.

PN1309

COMMISSIONER LEWIN: I don't think they are conducting public hearings.

PN1310

DR KATES: No, I know. If I could then turn to table 7, this is other buildings and structures, and this is your wharves and your harbours and your - this has been a quite extraordinary tale of woe. If you would look at the quarterly growth rates, what you will see is that, starting at December 1998, there has been an almost continuous downwards movement in the level of investment for other buildings and structures.

PN1311

So that - I mean, it doesn't come up very well because of the extreme volatility on the chart but the slowdown, which seems to peak in annual terms in December 2000 at a fall of 22.7 per cent, still as at December was 0.5 per cent lower than it had been in the previous December. So that at December 2001, it remained half a per cent lower than it had been in December 2000. So that this very important area of investment - this is a good deal of what Australia's future growth rate is dependent on - has been in something of a lull, and that the figure for December 2001 of 4240 million is well below, well below, the peak that you see there in September 1998.

PN1312

If we then turn to table number 8, which is on machinery and equipment, and again we find that yes, there is growth and yes, across the last half year you could say that there is a return towards something more normal but all that is following a period of a slowdown that sort of begins around September 2000 and continues for the next few quarters and that there is again an upturn in September 2001 of 2.4 per cent and this growth rate continues again into December at 3.7 per cent.

PN1313

But it is still, looking at the right-hand side, the 1.5 per cent and again we highlight the fact that if you just look at the last quarter, the last two quarters and they happen to be quarters of growth and you say, well, our problems are behind us, that is ignoring the fact that the growth rate has not been good and that we are coming off of a low base and that what we really should be recognising is not that we have put our problems behind us but that our number one priority ought to be establishing the recovery, making sure it really takes hold and, in particular, making sure that we get the kind of growth rate in investment that we might, but certainly have not yet, achieved.

PN1314

Turning then to table 9, this is business investment and, in essence, it is the previous tables without dwelling construction but it actually is, more technically, other buildings and structures, machinery and equipment, livestock and intangible fixed assets and it is a composite of all of those. What we say about this is the following. Firstly, the quarterly growth rate of 1.3 per cent, while being reasonable, is hardly exceptional by past standards. 1.3 per cent is very low. If you look up that middle column of data, you can see how much greater the kinds of growth rates we had in the past.

PN1315

We would note that the 1.8 per cent over the last half year is anything but exceptional. We would note that across the year the increase has been a minuscule 0.1 per cent and that the average growth rate between March 1993 and June 1999, had been on average 9.1 per cent. So it is from the period from March '93 until June 1999, the average annual growth rate had been 9.1 per cent. But if you look at that figure for June 1999 to the present, or the most recent quarter which is December 2001, there has been virtually no growth whatsoever. So that what we have had in business investment is that it has stopped still, it has just stopped.

[3.58pm]

PN1316

And that if we are seriously thinking about raising real incomes and raising living standards and doing the kinds of things we really do want to do, if we are thinking about what it will take to achieve that, then you have to recognise what these figures show us and that is that we have not got - we have lost momentum of investment and that until we get it back, until we can sustain that growth, we do not have - we will not have the kind of economic outcomes that we are looking for.

PN1317

I have written here that - I could mention the interest rates, but again it almost feels redundant. But at some stage I mention it again, that at some stage we are going to see interest rates rise. And if our past data are anything to go by it will stop the economy right there, we will hit a peak and then we will descend from there. And I think that is why we agree with many others saying that if we want to see this recovery stretch out into the future, that it will be prepared if the interest rates do not rise.

PN1318

We now look at exports and imports which is data in table 10. The figures show that almost the first - if we could look first at the exports and we look at the quarterly movement and we start from December 1999, where you will see that the quarterly movement was 3.4 per cent and these data are all in trend. If you look at the 3.4 per cent, since then exports have been on a downward trend quarter by quarter, so 3.4 was followed by 2.8 per cent and at the September quarter 2001, export growth became negative and had fallen by 0.8 per cent, and then in December it fell again by an even larger per cent and in this case it fell by 1.3 per cent. So that across the year the growth rate in exports has been negative and it has fallen by 1.1 per cent.

PN1319

Now, if you look then at imports you will also find that a very similar story is being told there, except that imports have begun towards the very end to reverse. So that you find at the quarterly growth rate as at September 1999, 3.8 and it continues to descend till a fall in the June quarter of 2001, where it fell by 1.1 per cent. Since then imports have risen by 1.4 per cent. So in terms of the charts, if you look at the two charts, you will see that exports have just continued to descend and in terms of imports they have begun to rise, they had fallen and have begun to rise.

PN1320

And this is comparable to the fall in Australia's economic growth rate shown by the data in the composition of growth, that net exports actually are beginning to slow the economy down. In the last year there was a fall of half a per cent in the growth of the Australian economy due to the rise in imports and the continuing fall in exports. So that net exports are a drag on the economy and given the international environment which still remains uncertain you would not be thinking that there is any certainty that we will get momentum built out of the growth in improvement in the balance of payments and in our international trading position.

PN1321

We now turn to look at the data on employment. And table 11 looks at total level of employment. And I will mention this because I think it is important just in terms of understanding what goes on in economic - economy generally. There are three peaks before which the employment data falls. There is the first one, you can see just on the extreme left hand side of the table, sorry of the chart, where it is at a peak and then it begins to descend and it descends for the subsequent two years.

PN1322

There then is another peak somewhere around March 1995, or perhaps the end of 1994 and then it descends again in to slow growth rate and it continues for another couple of years. And then finally at sort of towards the middle of 2000, March 2000, you see another suddenly - if you are thinking in terms of cliffs, falls off the cliff. And each of those moments is the moment when interest rates went up, give or take three months for the quarter that is where you start seeing the effect of higher interest rates.

PN1323

That is where the Reserve Bank in its attempt to maintain the inflation rate in Australia within its target range of 2 to 3 per cent, on each occasion when it has attempted to do that, through raising rates, the effect is instantaneous on the labour market and it has been devastating, devastating. So that when we say do not - we actually say that we are looking for a decision that does not tempt the Reserve Bank into pushing interest rates up further, we are seriously - we are aware of the kinds of effect that it has had in the past on economic growth generally and on the labour market in particular.

PN1324

Now, we also would note that the March quarter, in this case, is made up only of the figures for January and February. But to overcome that problem because it is the trend data, we compared the March quarter in quarterly data with October and November, the previous October and November and in terms of the annual figures it is with the same January figures, January and February of the year 2001. So that while it is not perfect and we will get the updated data in a day or so, it is nevertheless I think a reasonable compromise given the problems with the data.

PN1325

SENIOR DEPUTY PRESIDENT WATSON: Dr Kates, what are you asking us to do in relation to your submission about interest rates; am I right in understanding one proposition is that the decision should avoid in itself causing the Reserve Bank to take action on interest rates, ie increasing interest rates. But is there any submission beyond that, are you suggesting there is an imminent rise in interest rates which we should take account of and how do we deal with that sort of speculation?

PN1326

If you are right about the immediate and devastating effects of an interest rate rise, one wonders how the Reserve Bank would possibly increase interest rates if it were to have that effect.

PN1327

DR KATES: Yes. In one sense, the way those who run monetary policy think that the world - nothing else matters, so that everything else goes on to relevant - they make their interest rates and their decisions, and outcomes just follow. The sort of extreme monetarism which unfortunately happens to be the way that central bankers are schooled. But we do not think it is true, and in fact we are certain is it not true. And what we draw your attention to is the CPI for the December quarter, which came at a 3.1 per cent, and astonished everyone. And in fact it, in its own way, galvanised opinion about what might happen to interest rates right from that moment.

[4.06pm]

PN1328

COMMISSIONER LEWIN: That was not for the quarter. You mean annualised.

PN1329

DR KATES: Sorry, yes, thank you, Commissioner, yes, it was - the 3.1 per cent during the year to December 2001. And what we are - now, the Reserve Bank is - has put on the record that it will keep inflation within its target range over the course of a cycle, whatever that means. If we are going to ensure - out there something happened that caused interest rates to rise. Something that caused the inflation rate to rise to 3.1 per cent. The movement in prices in Australia, as we put into our original written submission, showed that the Australian growth rate in wages - sorry, I will say that again. The Australian growth rate in the CPI relative to other similarly placed OECD countries was something like a full percentage point higher, and then some.

PN1330

So that in the way the comparable data are measured so that there is the movement in the CPI was - took out the housing component, so that you could get basically a comparable data measure here and across the world - - -

PN1331

SENIOR DEPUTY PRESIDENT WATSON: Hasn't that been offset by a relatively higher productivity rate in Australia?

PN1332

DR KATES: Well, if the relatively high productivity rate one would have hoped kept inflation right down rather than pushed it up, so that the real concern is that even with these relatively higher productivity numbers, we nevertheless had a figure of 3.2 per cent growth in the price level. Using the one that - the headline measure, the 3.1 per cent, which was significantly higher by at least 1 percentage point and a good deal more compared with other economies.

PN1333

Now, what we are arguing is that we do not say that the safety net decisions are the full story of why - of the Australian inflation rate, but what we do say is that the differential, what has added that extra bit of momentum to Australia's inflation rate, has been the kinds of decision that are made as part of the safety net. That, as my - - -

PN1334

SENIOR DEPUTY PRESIDENT WATSON: Well, how is that so - are you going to make some sort of assessment of the levels of safety net adjustment over the period over which inflation is written?

PN1335

DR KATES: Well, it sort of gets built in, so that what we are saying is that, as my colleague already noted, that over the past five decisions there has been an increase in the minimum wage of $64. It has gone up by 18.8 per cent over five years. That this a kind of underpinning to the price level and to cost structures that exist in Australia, and I suspect in very few other economies - - -

PN1336

SENIOR DEPUTY PRESIDENT WATSON: Well, underpinning, but you are attributing safety net adjustments to having caused the increase in CPI, I understood.

PN1337

DR KATES: No, I am saying that the difference - the differential to some extent - hard to pull apart the growth rates - - -

PN1338

SENIOR DEPUTY PRESIDENT WATSON: But an underpinning cannot cause an increase if the underpinning is reasonably consistent.

PN1339

DR KATES: Well, if we have growth rate in minimum wages and minimum award wages, that is essentially unrelated to movements in productivity, so it just is passed on. Somewhere out there it does affect businesses' decisions in terms of how they want to price their products. They basically really have only three alternatives to accommodate the increase in your labour costs. You either increase your productivity, you reduce your wages bill, either through cutting hours or reducing employee numbers, or you raise your prices. One of those three is the only way in which businesses can accommodate those increases in cost. And what - pardon?

PN1340

COMMISSIONER LEWIN: You can reduce your margins too. You can reduce your margins too.

PN1341

DR KATES: Reduce your?

PN1342

COMMISSIONER LEWIN: Reduce your margins.

PN1343

DR KATES: Yes, I suppose there is that fourth one if - - -

PN1344

COMMISSIONER LEWIN: And no doubt some businesses must, because they do not have the market power to do anything else and they want to stay in business and to keep their market share.

PN1345

DR KATES: Well, I suspect that you could do that for one year, but you cannot do that forever.

PN1346

COMMISSIONER LEWIN: It might depend on who you were. If you were a private entrepreneur you might be prepared to take a lower rate of return.

PN1347

DR KATES: To some extent at some stage, but it would hardly be the general case. I would say that it is - to be arguing that what the safety net is attempting to do is redistribute income from profits to wages, would I think be - I think would not characterise what we are talking about. What we are attempting to assess is what is - what is the affordable increase that we can have.

PN1348

COMMISSIONER LEWIN: Yes, we may be straying from the point that you made, that provoked the intervention. Did ACCI last year - I seem to recall they did - estimate the contribution to the rate of inflation of various amounts of safety net adjustment as options during the course of the living wage case?

PN1349

DR KATES: I do not recall. I do not have any - - -

PN1350

COMMISSIONER LEWIN: Well, what did you say would be the contribution to the rate of inflation if the ACTU claim was awarded last year? You just pointed out that the rate of inflation on an annualised basis in December was 3.1 and then you quickly followed that by a submission that there was a cause and effect relationship between the 2001 safety net decision and that outcome. It seems to me, on my recollection, that your estimation of the contribution to inflation of even the ACTU claim being granted last year, which was far from what the eventuality became, was nothing like 3.1 per cent.

PN1351

DR KATES: Well, yes, I agree, Commissioner, it is not 3.1 per cent. That is exactly the point. There is an inflation rate that would happen without the safety net, if there had not been a safety net decision, and there is one that would have - did have. So that if you could just think of two worlds in which one there is a safety net and one there is not, what we are saying is that the safety net does add to inflationary pressures. And I can hardly see how that just is not straight-forwardly - - -

PN1352

COMMISSIONER LEWIN: Well, the ACTU says that it does minimally. It is a question of quantification, isn't it? Isn't the 3.1 per cent a red herring? The actual quantity that is at stake, isn't it?

PN1353

DR KATES: The actual?

PN1354

COMMISSIONER LEWIN: Not some sort of abstract extrapolation from what contribution a safety net adjustment of a particular magnitude might make up to the general level of inflation.

PN1355

DR KATES: I hardly think it a red herring. We are just trying to point out that the addition to the cost of labour of granting the ACTU claim this year would be, as we have estimated, something like 1.4 per cent on top of the cost of labour. And that 1.4 per cent would occur without any offsetting increases in productivity. There may be productivity at each of those individual workplaces, but the actual mechanism through which those increases take place are such that they occur whether or not there has been any offsetting productivity at those particular workplaces.

PN1356

We then make, I think, the point that if we have a 1.4 per cent increase in costs, in addition to the - sorry, a 1.4 per cent in addition to the cost of labour, in workplaces in which overwhelmingly there is no offsetting improvement in productivity, some of that spills out into the prices. We do not attempt to quantify it, but we do say that some of it must spill out into the price level and because it spills out into the price level, we are with an inflation rate already across the Reserve Bank's target range, above the 3 per cent maximum, we are tempting fate by pushing up the cost of labour into an environment where the Reserve Bank may be compelled to raise the rates.

PN1357

It was quite interesting to see that when the 3.1 per cent CPI figure came out in January, it was the Reserve Bank who attempted to hose it down and say, well, no, it is just a once-off figure, and it may well be the case. It may well be that it - - -

PN1358

COMMISSIONER LEWIN: I understand this part of your submission. It was the connections you made with the 2001 safety net adjustment that I thought was problematic.

PN1359

DR KATES: The principles remain exactly the same, that there were increases of $13, $15 and $17, that they were granted in workplaces that on the minimum rate, I think, were 3-odd, 3 per cent, 3 point whatever. There was a 3 per cent increase in the minimum wage and then it flows to other business as our data show. That these increases were granted at workplaces without any related improvements in productivity. There may have been improvements in productivity but there was no certainty that there were. And where a cost increase goes up, where there is an increase in the cost of labour, and there is no increase in productivity, and if those employees are to retain their jobs, then the only escape hatch is an increase in the price level. Unless, of course, businesses do want to reduce margins which is a very short term solution.

PN1360

But over time the only way, once you have had no increase in productivity, if you are going to keep all of your employees, then you must finance in way or another, and the way you finance that is through increasing your prices. And that does flow into the CPI.

PN1361

JUSTICE GIUDICE: Dr Kates, seeing we have distracted you fairly significantly from the course of your submissions, it might be an appropriate time to adjourn. We propose to resume at 9.30 in the morning to sit until 12.30, with a mid-morning break, resume at 1.30 and conclude the day at 3 o'clock. We will adjourn now until 9.30 in the morning.

ADJOURNED UNTIL FRIDAY, 5 APRIL 2002 [4.19pm]

INDEX

LIST OF WITNESSES, EXHIBITS AND MFIs

EXHIBIT #M1 JOINT SUBMISSION OF THE LABOR GOVERNMENTS DATED 08/02/2002 PN1095
EXHIBIT #ACCI2 SUBMISSION OF 01/03/2002 PN1150
EXHIBIT #ACCI3 REPLY SUBMISSION OF 28/03/2002 PN1150
EXHIBIT #ACCI4 DOCUMENT PN1180