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Monday, 7 December 1998
Page: 1510


Mr GEORGIOU (6:10 PM) —The 16 goods and services tax bills we are debating today will usher in a new tax system for Australia, a tax system which is well and truly overdue, a tax system for the new century. Australia's current tax system is complex, confusing, inefficient, inconsistent and unfair. It is in need of fundamental reform. This government is committed to bringing about such reform.

The problems of Australia's tax system are multiple and well known. Average income earners face high marginal tax rates, with a person on average weekly earnings paying 43 cents tax on every additional dollar they earn. The interaction of the tax and social security systems creates unfair anomalies and disincentives to work. Indirect taxes are complex, hidden and counterproductive. Business taxation arrangements are overly complex and also give rise to avoidance opportunities.

Before the last election, the government announced a detailed and comprehensive plan to address these problems and shortcomings. The government took its plan to the electorate and won a majority of seats in this House. The government's plan, which is embodied in these bills, touches most parts of the tax system. It involves income tax cuts, better integration between income tax and social security, business tax reform, changes in tax administration and an overhaul of Commonwealth-state financial relations.

Unsurprisingly, however, given the history of tax reform in Australia and the position of the Australian Labor Party, considerable attention has been given to the reform of indirect taxes. The rationale behind the reform of Australia's indirect tax system—if indeed it is possible to classify the maze of Commonwealth and state indirect taxes as a system at all—is a substantial one. The current system involves multiple indirect taxes, many of which are themselves levied at multiple rates creating unnecessary complexity and distorting economic activity. The existing indirect tax base is limited and diminishing as a portion of overall economic activity, placing increasing pressure on government revenues and other revenue sources.

Various indirect taxes levied by the states and territories are not only inefficient, but in many cases are also regressive. Reform in these areas is vital. There are of course other important advantages of indirect tax reform. Today I want to touch briefly on the importance of indirect tax reform for Australia's balance of trade and its current account.

Under Australia's existing arrangements, indirect taxes—wholesale sales tax, fuel excises, taxes on financial transactions and various state stamp duties—impact on the cost of production for Australian industries. While it is generally the case that exporters do not directly charge WST on their sales and can get limited exemptions from WST on their immediate business inputs, some part of Australia's indirect tax burden inevitably creeps into their production costs. This occurs through the application of wholesale sales tax to indirect business inputs—for example, office furniture and transportation costs—through the so-called `cascading' of WST down the supply chain, and through the incidence of other indirect taxes.

The Institute of Chartered Accountants has estimated that the export price of Australian made goods is prejudiced by as much as nine per cent, with an average in the area of five per cent, because of indirect taxes imposed on business costs. The Commonwealth Treasury has estimated that the indirect tax changes outlined in the government's tax reform plan will reduce costs on Australia's exporters by $4.5 billion, or by about 3.5 per cent. This change will make a positive contribution to the position of Australian exporters in highly competitive international markets. In simple terms, Australian products will become cheaper and, as a result, we will be able to sell more of them.

But it is not only our exporters who are disadvantaged by Australia's indirect tax regime. Our import competing industries are also affected. Most of Australia's trading partners opted long ago to ditch their wholesale sales tax systems and now operate some version of a goods and services or value added tax. In most cases, these regimes allow for the rebating of all sales taxes levied on business inputs and do not levy tax on exports. Such foreign goods compete in Australia against goods which not infrequently carry a substantial hidden sales tax burden.

The net effect of these rather perverse tax arrangements is to reduce the competitiveness of Australian exports and increase the competitiveness of foreign exports into Australia. These arrangements work as a kind of `negative tariff' on both imports and exports. The government's plan addresses this competitive barrier facing Australian industry.

Under the plan, GST levied on the cost of business inputs will be fully rebateable. No GST will be levied on exports. GST will be charged at 10 per cent on imports to Australia, the same rate of tax as will apply to domestically produced goods. This will put Australia's exporters and import competing industries on a level footing with their international competitors and make a positive contribution to the balance of trade and the current account.

It is sometimes argued by economists that such improvements in international competitiveness and the balance of trade will be short lived and that the improvement in our trade position will lead to an appreciation in the currency which will offset improvements in our competitiveness in export markets.

I was very interested to read such an argument recently, on an Internet site prepared by the Australian Labor Party. It is a worthwhile effort and it is very important that they should put some stuff on their Internet sites rather than vandalising the Liberal Party's. The relevant article, imaginatively titled `Economic Snake Oil: The Oversold Advantages of a GST', puts the argument in the following terms:

In fact, the competitive advantage from the introduction of a GST or VAT will be offset over time by a rise in the exchange rate. What exporters might gain from a GST, they lose over time from an increase in the price of the Australian dollar.

I must confess that sometimes I treat the economic arguments advanced by the Labor Party a little bit lightly, and I am afraid I was also tempted to treat the shadow treasurer's description of the enormous achievements that Labor made over 13 years even more lightly. But this particular argument did catch my attention.

In fact, it is a mirror image of Paul Keating's famous J-curve—an inverted J-curve. We all remember that Mr Keating had a fantastic way with words and, for a little while, the J-curve did catch the public imagination and entered into the lexicon. No sooner did that happen, than Mr Keating decided he would be better off not speaking about it again and it vanished from the lexicon. But the simple fact is that the exchange rate is a much more complex creature than economic purists would have us believe. Nonetheless, even if we take economists at their word and accept that any improvement in competitiveness would be offset—in that lovely economists' phrase—`over time' by an appreciation in the exchange rate, Australia would still be better off.

The current account is about a lot more than just imports and exports. It also reflects significant financial flows, particularly the servicing of accumulated debt. An appreciated exchange rate makes this task much easier. It also lowers the cost of imported capital goods or intellectual property. This is important, not just from an abstract economic perspective, but in terms of Australia's economic and employment growth and long-term economic prospects.

The Leader of the Opposition has often criticised the government's tax plan on the basis of a partial, incomplete and partisan analysis. Not only does he treat the GST as though it was being introduced in isolation—rather than as part of a comprehensive plan for the reform of Australia's tax system—but he also overlooks its capacity to contribute to reducing a major barrier to economic growth and job creation—a barrier he knows about quite well.

On 31 August 1995, the Leader of the Opposition, in his former role as the Minister for Finance, delivered a speech to the Economist Intelligence Unit, titled `Managing the Long Upswing'. In that speech, the Leader of the Opposition said:

What we want as a nation, and what we are working steadily towards is sustained high jobs growth and low interest rates for Australia . . . There are challenges in this process . . . Historically, Australia has found it difficult to put together the low interest rates/high growth equation in a sustained way. Deficits on the current account have at different times been a serious constraint and are again today . . . A current account deficit is no bad thing in itself. Australia has almost always had one . . . The problem is when the current account deficit gets too high . . . In the past, Australia's current account deficit has tended to shoot up when growth did. This was usually followed by increased interest rates to stop demand spilling over into too many imports.

In other words, the current account imposes a speed limit which prevents the economy from growing as quickly as it otherwise might. Given that economic growth is the major generator of employment, anything that contributes to easing the current account speed limit would be highly beneficial. The government's reforms will make such a contribution.

The Leader of the Opposition and the Labor Party are, however, proposing to block them for reasons which seem to have more to do with politics than with jobs. But then Labor has always played politics with the GST since it abandoned option C in 1985. In 1993 and 1998 Labor adopted a policy of blanket opposition to the coalition's tax reforms. Nonetheless, Mr Keating said that, if defeated, the Labor Party would not oppose the passage of the reforms through the Senate. The current Leader of the Opposition, on the other hand, said that if Labor were defeated, it would continue to oppose the passage of the GST.

Mr Keating wanted to put up maximum barriers against losing government. His successor wanted to lay the groundwork for a populist second-term agenda in opposition.

The outcomes of the elections were different. In 1993 Labor won and was faced with the reality that it could not sustain its promises. Labor increased taxes and, from the 1993 budget on, the Keating government's credibility and standing were terminally damaged. In 1998 Labor lost the election, so it does not have to face Mr Keating's dilemmas but it does have to confront quite substantial problems of a different sort—the problems flowing from the political consequences of obstructionism.

There has been much discussion about the notion of a mandate since the election, and the shadow treasurer continued that discussion today. I personally gave up political philosophy some time ago when I was asked, `Is that wall really there?' but it seems to me that the ultimate mandate in Australian politics is bestowed by winning a majority of seats in the House of Representatives. This gives a party the authority of government and the capacity to pass legislation through the House. This authority is diminished when, as in the case of the Keating government, it is used to overturn the government's fundamental campaign commitments.


Mr Tanner —You used to work for Malcolm Fraser. How can you say that?


Mr GEORGIOU —Well, listen very carefully in that case. It is enhanced when used to implement such commitments. This is what this government is doing in the case of the tax reform package. The government made its intentions clear to the electorate during the campaign and won a majority of seats in this House. It now has the unambiguous responsibility to implement the platform on which it stood and on which it was elected. It is doing so.

The problem for Labor is that its response, day by day, falls into the trap of political negativism and obstructionism. The simple meaning of that is opposition for its own sake. I believe that the Australian people concede a wide role for oppositions, but they will not wear obstructionism.

The fact is that Labor is not just opposing the GST but also opposing broader tax reform which is seen as important in itself and long overdue. Labor is opposing income tax cuts, worth $13 billion, which will see over 80 per cent of Australians having a marginal tax rate of 30 per cent or less. Labor is opposing family tax measures which provide real benefits to families with children. Labor is opposing the abolition of wholesale sales tax.

Beyond this, Labor's ability to play politics with the tax reform package has been fundamentally undermined by its obstruction of the government's 30 per cent rebate for private health insurance. This obstruction is not justified by policy good sense nor by political imperatives nor by campaign declarations. The private health insurance rebate will put cash in people's pockets where it is needed. The good sense of the rebate is there in terms of taking the burden off public hospitals, and it is widely appreciated.

Overall, as a consequence of Labor's actions, I believe that the public is rapidly being persuaded that not only does Labor not have any policies but its only mission is obstructionism—obstructionism designed to destroy popular and effective measures proposed by this government. I believe the Australian people will punish Labor for this. I commend the bills to the House.

Sitting suspended from 6.27 p.m. to 8.00 p.m.