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Tuesday, 8 December 1998
Page: 1628

Mr PROSSER (9:00 PM) —During the last election, our government outlined a vision for Australia and a plan for the economy. Central to this plan was the need for taxation reform, including the introduction of a broad based GST. We identified the problem with the current tax system, we sought a mandate and the people said yes.

Australia has a modern, dynamic economy with an antiquated taxation system. When our taxation system was formed, Australia consumed a smaller percentage of services than we do today. Accordingly, taxing services was not a priority. It was not a significant tax base from which to gain revenue. Since then, our economy has modernised and we now find ourselves consuming fewer goods and proportionately more services—services that are currently untaxed.

The math is pretty simple: to maintain a consistent revenue base without taxing services, we need to either increase indirect taxes such as the wholesale sales tax or increase the tax on income. Both these outcomes have occurred. When the wholesale sales tax was introduced in the 1930s, the rate was 2.5 per cent. Now, the general rate is 22 per cent, with multiple rates ranging from 12 per cent to 47 per cent. It has risen by stealth and no mechanism exists to check its rise. In fact, most people would have no idea as to the rates of wholesale sales tax they currently pay on everyday items.

These indirect taxes cascade through the production process and penalise Australian exports, reducing our international competitiveness and holding back job growth. At the same time, income tax rates have risen and bracket creep has pushed up the majority of Australians into the top tax brackets. Clearly, we need to address this problem. We need to reform this taxation system to restore the balance between taxation on income and taxation on expenditure. We need to reform the taxation system to make taxes more visible.

These bills before the House do just that. They reduce business costs and they deliver lower taxes and fewer taxes. They also provide more incentives to work, save, invest and compete. These bills are part of a package of reforms embarked upon by this government after the disaster of Labor. Tax reform was a tough decision. To take a new taxation system to the people during an election had never been tried before in Australia. We let the Australian public judge us on our achievements rather than on our promises. We let them judge us on the $2.7 billion budget surplus we delivered, the $31 billion of Labor's debt we have repaid, the record low interest rates we have achieved, the low inflation we have delivered and the 350,000 new jobs we have created.

Australia now has an economy in good shape, with five per cent growth this year. We have a well-trained, well-educated work force, a good legal system and a culture that lends itself to technology. We now need to ensure that we emerge as leaders in the new millennium rather than followers. To achieve this, we have outlined a plan for taxation reform, and although it is tough—and tough decisions are often unpopular—it is the right decision economically.

We have pursued these reforms because we believe governments have a priority to get the economic fundamentals right. This means ensuring that the nation's gains are not consumed by inflation, that the citizens are not burdened by excessive government debt and that the dream of owning a home is not shattered by high interest rates. We believe that having a taxation system so heavily dependent on taxation of income is regressive, and we have outlined a plan to relieve this burden. Under our plan, the top marginal rate paid by 81 per cent of Australian taxpayers will be 30 cents in the dollar or less. But it is more than just relieving the pressures of bracket creep: this package of bills makes businesses and exports more competitive by removing embedded sales taxes.

There are many other governments around the world that have failed to take the tough political decisions demanded by reform, and these countries are now paying the price. Look at Japan, for instance; the economy that was once the envy of the world is now in recession. Why? Because they have lacked the political will to reform their economy, they have failed to reform their banking sector and they have failed to free up their labour market. In short, Japan has failed to meet their country's challenge of opening their economy and now they are paying the price.

Even Labor have acknowledged the need for tax reform, particularly the movement towards the adoption of a broad based con sumption tax. Back in 1985, Kim Beazley said:

There are very few such societies which operate with a taxation system so heavily dependent on income tax as we do and very few which don't have a substantial component of their tax system reliant on broadly based consumption tax.

Or there are Paul Keating's comments on the three main advantages of a consumption tax, which he made on 9 June 1985. He said:

First, it will allow a more rational indirect tax system than the current anomaly-ridden wholesale sales tax, which has multiple rates, numerous exemptions, and fails to tax the services sector. Second, it will enable us to generate tax revenues to provide for a major reduction in the marginal rates of income tax. No other tax has the same potential for this purpose. Third, it generates tax from those who will continue to evade or avoid income tax . . .

Yet Labor opposes tax reform. I would imagine that one would be hard-pressed to find any financial authority in the world that would not welcome the reforms we are proposing. The IMF, one of the world's most influential financial organisations, has put its full weight behind our proposed tax reform, in particular the introduction of a GST. Stanley Fischer, the IMF's First Deputy Managing Director, said that the coalition's tax reforms were:

A change toward the efficiency of a tax system: it is a good reform. Economically, it is a fine time to do it. But economically it would have been a fine time to do it five years ago as well. It would be an improvement to the tax system.

At present, many businesses have cash tied up in sales tax paid stock. These bills will enable businesses to receive their sales tax paid back because the GST is refundable to business; their stock will effectively be tax free. It is important, because business is all about a return on capital invested. If we can lower the costs to business by removing these taxes on business, it becomes easier to achieve a return on capital invested. If business can be relieved of the burden of having that tax paid up in stock, they can of course reinvest that back into their business, employ more people and run their business more efficiently.

These bills remove the tax on doing business and provide Australia with the foundation for a modern, fair taxation system. These measures will improve the balance between the tax on income and expenditure. This way, when people have the opportunity to work longer and harder, to afford a new family home, or to fit out a bedroom for an upcoming new family member, they will be able to do it without being penalised. This tax system restores the incentive to earn and save.

Taxation reform is just one part of a broader package of economic reforms put forward by this government. These reforms are vital to Australia's future. They address the challenge of globalisation and prepare Australia for the increasingly competitive business environment in the 21st century.

Competition is already profoundly changing the Australian economy by lowering business costs, enhancing competitiveness and providing the conditions for more sustainable economic and employment growth. Governments have an important role in providing the legislative and institutional framework to aid this competition. Governments fulfil this role because they are referees, not players. Central to this environment is the need to increase the competitiveness of Australia's exports. These reforms will slash some $4.5 billion off the cost of our exports, enhancing our competitiveness and boosting our economy.

Part of our tax reform package will involve the states removing stamp duties from loan mortgage securities. The government's role in a dynamic economy should be the removal of these barriers to competition and efficiency. In no area is this more important than banking reform. In a speech on reform of the financial system in May, I briefly mentioned the need to implement the remainder of the Wallis report's recommendations, namely, the abolition of the four pillars policy. We now need to examine the four pillars policy to ensure that our safety net does not become a straitjacket in our banking sector.

It is important that we allow any possible transition towards a merger between the big four to occur smoothly, to ensure that labour market shifts occur gradually. Many of the reforms we have brought about in government have involved a shift in employment from one sector of the economy to another. Look at waterfront reform: the problem was an over supply of labour, resulting in inefficiencies. The same story applied to rail reform and the Public Service. These sectors possessed an excess of labour that had to be taken from one sector to be deployed in another. The resulting increase in labour efficiencies and lower costs helped create employment in other sectors of the economy.

Our government's reforms are aimed at creating a more efficient economy. Tax reform lowers the cost of doing business by removing the embedded and cascading existing sales taxes. If you can lower the costs of doing business, you stimulate demand through lower prices and you can generate new jobs. These are the best jobs governments can help create—jobs arising from increased demand, greater competitiveness and greater efficiencies in the economy.

We cannot take a snapshot view of labour market restructuring and quarantine industries from reform because we fear employment dislocations. Employment is constantly evolving. The argument should not be about ensuring there are no job losses; it should be about creating employment through greater efficiencies, and this should be the crux of government reforms.

Our government is committed to financial reform. We instigated the financial systems inquiry in 1996 and have since implemented many of the report's recommendations. We have allowed building societies to issue cheques; we have granted banking licences to building societies and insurance companies; we have established the Australian Prudential Regulation Authority, and we have achieved it without too much drama. Now we need to abolish the four pillars policy. If we are confident about our prudential regulation and supervision, the level of competition in the banking sector, and the power of the ACCC, then a merger between the four big banks should not be resisted.

Critics argue that any proposed banking merger between the big four would consolidate the power of the largest banks and reduce competition. I disagree. Australia's superannuation savings have reached $359.4 billion and are growing at a faster rate than bank deposits. This injection of funds into the financial services sector has given rise to new mortgage originators that offer enormous competition to the big four, particularly in the area of home loans. Banks have responded to this competition by lowering their margins. It is important to remember that, while bank fees are a relatively new phenomenon in Australia, we are not really paying more for banking services—in some cases quite the opposite. The transparency in bank fees merely signals an end to the cross-subsidy of expensive transactions through higher bank margins—and it is a transparency that should be welcomed because it enables banks to direct customers towards more efficient technologies. Basically, business and banks are partners.

Australia must rid itself of the `nanny state' mentality. We seem to enjoy protection from everything—including information. Would we prefer our bank to conceal their fees behind higher margins? I do not think so, because greater transparency enables us to make better choices. Better information provides us with the flexibility and freedom to move to the most competitive financial service provider. And this is something our government has helped create with the proposed scrapping of stamp duties on mortgage securities. This will enhance competition, because it enables borrowers to switch to more competitive banks without having to pay stamp duty on the same loan security.

Abolishing the four pillars policy will pave the way for the creation of a world-size bank capable of competing in the international marketplace. This would enable Australia to be recognised in the international marketplace. Our reforms of the tax system, our reforms of business, will make Australian business more competitive, create more jobs and bring about a more dynamic economy.