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Monday, 23 February 1987
Page: 421

Senator GILES —My question is addressed to the Minister representing the Treasurer. Has the Minister's attention been drawn to an article in today's West Australian reporting comments by the Premier of Western Australia, Brian Burke, to the effect that if Sir Joh Bjelke-Petersen's tax plans were implemented without any corresponding cutbacks in expenditure, the Federal deficit for 1987-88 would reach $14 billion, interest rates for mortgages would climb above 20 per cent, most forms of investment and housing construction would fall off, and there would be major drops in the value of the Australian dollar? Is Premier Burke's analysis essentially correct?

Senator WALSH —It is essentially correct but, I believe, understated. I am not sure of the basis on which Premier Burke compiled his estimate of $14 billion. For example, I am not sure whether he took any account of the necessary adjustment in the rate of tax for companies, the alternative to which would have been a very substantial erosion of the company tax base. I suspect that that was not taken into account in the Premier's assessment of $14 billion.

My estimate for the loss to revenue flowing from the adoption of Sir Joh's `25c, 25c' policy would be $16 billion or more. As a consequence of that, and this is not something that can be precisely calculated, if the Treasury were then to attempt to sell more than $16 billion worth of government bonds, or their equivalent, there would certainly be a very sharp rise in interest rates-I would expect much more than 20 per cent and more likely in the 30 per cent to 40 per cent range that I suggested last week when I was detailing the two possible scenarios if there were to be a change of government. The first scenario was with Sir Joh as Prime Minister, calling the senior Public Service officials together and saying `25 per cent flat tax, 25 per cent flat tax'. The reply from the officials would be `But, Prime Minister, if we have your tax policy, we will have a $16 billion deficit', to which Sir Joh would reply: `Don't you worry about that; don't you worry about that; that's immaterial.' The Treasury would then try to sell the $16 billion worth of government bonds, interest rates would hit 30 per cent or 40 per cent and the Prime Minister would call the officials in again and say: `Bring down interest rates'. Then the white shoe brigade would tell him to get interest rates down by ordering the Treasury to stop selling bonds-in other words, not to fund the deficit. For a period interest rates probably would come down before the dollar crashed and hyperinflation set in.

Of course, the other scenario was of John Howard as Prime Minister, implementing his tax policy as amended by Sir Joh. The senior Public Service officials would say: `But, Prime Minister, there would be a $10 billion or $11 billion deficit if we were to do that'. Mr Howard would say: `Don't you worry about that. That is what it was when I was Treasurer'.