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That old chestnut: Costello wheels out myth 14 ('raiding the Future Fund')



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WAYNE SWAN MP Federal Labor Shadow Treasurer

THAT OLD CHESTNUT: COSTELLO WHEELS OUT MYTH 14 (‘Raiding the Future Fund’)

Peter Costello today wheeled out Myth 14 in Parliament today, reheating his desperate “raiding the Future Fund” claims.

But strangely, he neglected to mention his own proposal to take $5 billion previously committed to the Future Fund to finance his Higher Education Endowment Fund.

The Treasurer’s shameless hypocrisy on this topic is set out further in Myth 14, reproduced below.

Alternatively, refer to the attached document for the full catalogue of the hypocrisy and dishonesty of the would-be Prime Minister.

Myth 14: The Treasurer claims that Labor’s plan to invest $2.7 billion of Telstra shares

notionally allocted to the Future Fund in communications infrastrucuture is raiding the Future

Fund, while the Government’s plans to divert $5 billion from the Future Fund somehow is

not.

Reality: Costello’s credibility has been categorically undermined by the Government’s own

financing mechanism for its ‘Higher Education Endowment Fund’.

By taking $5 billion from the surplus that had previously been committed to the Future Fund,

the Government has destroyed any claims that Labor would undermine the Future Fund’s

ability to meet its target of funding public sector superannuation liabilities.

Finance Minister Nick Minchin002C 26 March 2007:

“Certainly this year’s surplus and next year’s surplus will be going into the Future Fund”.

18 June 2007

Contact: Matthew Coghlan

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THE TREASURER’S ECONOMIC MYTHS: 14 AND COUNTING

Myth 1: The Treasurer asserts that the benefits of the biggest terms of trade boom in half a

century are somehow quarantined to company tax paid directly by the mining sector.

Reality: This assertion represents a fundamental misunderstanding of the flow-on effects from a

higher terms of trade, which has provided a massive windfall to the budget.

The Treasurer’s assertion ignores the higher company profits and company tax paid by associated

industries benefiting from the mining boom, like construction and transport companies, finance

companies, labour hire businesses and so on.

He ignores higher capital gains taxes from higher dividends paid to shareholders; and in higher

income tax collections from stronger employment and wage growth — not just in the mining sector

itself, but also in other businesses serving it such as construction and finance who provide the

capital for infrastruture projects — and the list goes on.

Since the start of the mining boom, the Government has received a budget windfall of

$398 billion over and above original estimates, according to estimates by ANZ chief economist

Saul Eslake. This has enabled tax cuts in recent budgets.

The Organisation for Economic Co-operation and Development (OECD) has also noted in its

Economic Outlook report that “those countries that are major commodity producers (particularly

Norway, Canada and Australia) have benefited from a tax windfall resulting from high commodity

prices.”

Myth 2: The Treasurer claims that industrial relations reforms have underpinned strong jobs

growth.

Reality: In a candid interview with the Financial Review on 18 December, the Treasurer admitted

that the Government’s workplace laws don’t create jobs - the economy does.

Right now the Australian economy is being swept along by the strongest global economic growth

in more than thirty years.

Led by China and India, this strong growth has underpinned a dramatic surge in the price of our

commodity exports and has helped take our terms of trade to their highest level in more than fifty

years.

This is having a dramatic impact on the Australian economy. It has boosted national incomes,

corporate profits and employment growth.

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ABS data reveal that the mining states of Western Australia, Queensland and the Northern

Territory have accounted for almost half of all employment growth in recent years - despite

making up less than a third of the labour force.

Unemployment in Western Australia is now down to 3.2 per cent and in Queensland it is 3.4 per

cent - compared to the national average of 4.2 per cent.

While the mining states have seen the greatest direct benefits from mining boom, other states

have also benefited indirectly from the boom. As the Reserve Bank noted in its Statement on

Monetary Policy released this month, the increase in Australia’s terms of trade and the:

associated increase in national income has benefited all states through such channels as higher

dividend payments to shareholders, increased demand by the resource-rich states for goods and

services from the other states, and higher Government revenues.

This view is also supported by Treasury Secretary Ken Henry who argued in his March speech to

Treasury staff that: “Much of our recent macroeconomic and fiscal success is based on past

reforms, assisted by the terms of trade.”

Myth 3: The Treasurer claims that Labor’s industrial relations system will lead to a wage explosion

and fuel inflation.

Reality: One of the Government’s key claims about Work Choices is that it would lead to higher

wages. The Treasurer cannot claim that Work Choices causes wage rises and then complain that

getting rid of it will cause wage rises.

Labor will not be going back to centralised wage fixation. After all, it was the Hawke and Keating

Governments which moved away from nearly a century of centralised, arbitrated wage fixation in

this country.

It was this move by Labor which stopped the damaging wage price spirals of previous decades -

the last of which was on John Howard’s watch as Treasurer under the Fraser Government.

Under Labor’s industrial relations system wage outcomes will be determined at the workplace

enterprise level based on productivity improvements. This will deliver sustainable wages growth

that will not fuel inflation.

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Myth 4: The Treasurer claims that good economic management is about having the foresight to

know what needs to be done prospectively.

Reality: The Treasurer hasn’t had the foresight to deal with the core challenges of securing

prosperity beyond the mining boom and tackling dangerous climate change.

For at least a decade we have known that if strong growth continued, we would eventually

encounter skills shortages and capacity constraints accompanied by the risk of high inflation and

higher interest rates.

But rather than take the steps necessary to address these constraints, this Government sat back

and watched as our productivity growth began to decline; as our economy ran into critical skills

shortages and capacity constraints; and as real output growth began to slow.

The Treasurer has also turned a blind eye as it has become rapidly more evident that climate

change is discernibly affecting Australian water supplies and our ability to sustain agriculture.

The Treasurer has also come under heavy criticism from the Secretary of his own department -

Dr Ken Henry - for ignoring Treasury advice and expertise on water and climate change leading to

far inferior policy outcomes:

We have also worked hard to develop frameworks for the consideration of water reform and

climate change policy. All of us would wish that we had been listened to more attentively over the

past several years in both of these areas. There is no doubt that policy outcomes would have been

far superior had our views been more influential. That is not just my view; I know that it is

increasingly widely shared around this town.

This Government has not had the foresight or the policy conviction to tackle climate change. They

have refused to ratify the Kyto Protocol, they have refused to increase the mandatory renewable

energy target; they have refused to cost the economic impacts on Australia of failing to act on

climate change; and they have refused to establish a framwork for carbon pricing.

The Government has now finally accepted we need an emissions trading scheme - after years of

scaremongering that such a scheme would cripple our economy.

But the scheme won’t be established for another five years - which will make it nine years since

the Government rejected a submission to cabinet in 2003 advocating the need for such a

scheme.

And after finally accepting that it is necessary to set targets - the Government is refusing to do so

until after the election. A scheme without targets for emissions reductions will not provide

businesses with the certainty they need to drive investment in low carbon technologies and other

climate change mitigation measures.

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Myth 5: The Treasurer claims that the Government has always been prepared to argue for tough

reforms and that Labor has opposed all of the major reforms that have brought the Australian

economy to where it is now.

Reality: Most of the toughest economic decisions that have helped set up the current prosperity

were made by Labor.

We floated the dollar; deregulated banking and finance; brought down tarrifs and opened our

economy to the world; reformed our corporate and personal income tax systems; transitioned

from nearly a century of centralised wage arbitartion to a wholly new system of enterprise

bargaining; and implemented national competition policy.

These decisions propelled us into the global economy and laid the economic foundations for

sixteen years of strong growth and prosperity.

In fact, in a speech to the Australia-Isreal Chamber of Commerce in April this year, the Prime

Minister acknowledged that our current prosperity owed much to these five major reforms - all of

which were orchestrated by the previous Labor government.

By contrast, the Coalition opposed the introduction of the superannuation guarantee, it opposed

the move from centralised wage fixing to business level enterprise bargaining, and it opposed tax

base broadening to fund cuts in personal and corporate tax and the introduction of the assets

test on the age pension.

Myth 6: The Treasurer claims that Labor doesn’t have a tax policy.

Reality: Labor has consistently called for personal income tax reform to address disincentives for

workforce participation and skill formation. The tax cuts in this year’s Budget went some way to

addressing the worst disincentives and that is why Labor has supported them.

In May 2005 Labor outlined its alternative tax plan, which included lifting the threshold for the

30 per cent tax rate and increasing the low income tax offset. The Treasurer adopted these two

initiatives in the tax cuts in this year’s Budget. In fact, 85 cents of every dollar of tax cuts in this

Budget was authored by Labor.

Every member of the Government voted against Labor’s 2005 amendments. The Treasurer

labelled our tax plan as a “cobbled together, confused, misdirected, unthought through proposal.”

This is the same plan that he has only now just adopted himself.

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Labor will be taking a tax policy to the next election. We have already proposed halving

withholding tax on foreign managed funds in Australia. Labor will also pay every dollar of the tax

cuts in this Budget if elected.

And, subject to our strict Budget Rules and taking into account competing priorities, we will be

examining what further improvements can be made to improve incentives for middle to low

income families and second income earners, who still face significant disincentives from our tax

system.

Labor’s strict Budget Rules prohibit any increase in tax as a proportion of GDP from current levels.

Myth 7: The Treasurer claims that if Labor were elected Labor would increase the GST.

Reality: A Federal Labor Government would not be increasing the GST as we have made clear

publicly on many occasions. This is blatant fabrication by the Treasurer.

The only person who has has sought to extend the GST in this country is Peter Costello, who

wanted the GST applied to all food products.

Myth 8: The Treasurer claims to have lowered tax as a proportion of GDP.

Reality: The only way the Treasurer can claim to have lowered tax as a proportion of GDP is by

excluding the GST from its measure of taxes while still including the tax that it replaced.

On any credible measure, this Treasurer is the highest taxing treasurer in Australia’s history. As

Macquarie Bank economist Rory Robertson states: “Unscrambling the underlying Budget data, we

find that Canberra's tax/GDP ratio - on any credible/consistent measure - is hovering around all-time highs.”

Myth 9: The Treasurer claims that the states are swimming in revenue.

Reality: The states in aggregate will receive $2 billion more in GST receipts in 2006-07 than they

would have received under the previous system of federal-state financial relations. In contrast,

the Treasurer is set to reap $25 billion extra in tax revenue in the current financial year alone

compared to original estimates.

ABS figures show that states’ own taxes grew by $6.4 billion over the six years to 2005-06. In

contrast, Commonwealth taxes (excluding the GST) grew by $55 billion over the same period.

6

When it comes to revenue windfalls, the Treasurer has received the biggest windfall of all. Over

the last two budgets alone, the Treasurer has received a revenue windfall of $96 billion.

As Macquarie Bank economist Rory Robertson has argued, “A genuine understanding of the

Federal Budget in the 2000s starts with the observation that Canberra has been collecting more

tax revenue as a share of GDP - and keeping more for its own use - than ever before.”

His analysis shows that far from receiving a GST revenue bonanza, funding to the states has

actually flat-lined under the current Government.

Myth 10: The Treasurer claims that Labor’s target for carbon emission reductions will destroy the

economy.

Reality: Labor’s target to reduce carbon emissions by 60 per cent by 2050 is based on the

scientific evidence about the action needed to prevent dangerous climate change and has been

endorsed by the CSIRO.

This target is also economically responsible. The Business Roundtable on Climate Change

reported last April that “a 60% reduction in greenhouse gas emissions from year 2000 levels by

2050 is possible while maintaining strong economic growth.”

That modelling found that the cost to the economy of meeting the target would be just

0.1 per cent of GDP per annum, before taking into account the economic benefits of avoiding

dangerous climate change.

To put this into perspective, the ABS estimates the drought will subtract around 0.6 per cent from

GDP growth this year.

The Business Roundtable report also showed that delaying action would cost twice as much as

early action and generate fewer jobs. So the Government’s prescription of delayed action is a

recipe for higher, not lower, economic costs.

Myth 11: The Treasurer claims that no state government has cut taxes.

Reality: The Western Australian government in its budget cut stamp duty for first home buyers on

homes up to $500,000. The Queensland government lifted the payroll tax threshold and the land

tax threshold in last year’s budget, and in the 2004-05 budget implemented stamp duty relief for

first homebuyers. The Victorian government in its budget cut the top rate of land tax and reduced

stamp duty on new motor vehicles worth between $35 000 and $57 009. Late last year the

Victorian government also reduced payroll tax and abolished business rental duty.

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The states also abolished a range of taxes under the second tranche of the Inter-Governmental

Agreement including stamp duties on non-residential conveyances, mortgages, leases, and credit

and rental arrangements.

Myth 12: The Treasurer denies that his own budget papers contained forecasts of real GDP and

employment growth that imply productivity growth would be near zero this current financial year.

Reality: Real GDP growth is driven by growth in population, participation and productivity.

Population and participation is reflected in overall employment growth.

Page 1-5 of the budget papers reveal the forecast for real GDP growth this current financial year

is driven entirely by growth in employment, implying that forecast productivity growth is zero.

Myth 13: The Treasurer claims that Labor’s plan to halve the current 30 per cent withholding tax

on distributions from Australian managed funds to non-resident investors would benefit

foreigners over Australians and will cost $100 million.

Reality: Labor’s costing is based on independent modelling which shows a cost to government

revenue of $15 million per year. The Treasurer’s costings assume a gearing rate for investments

in Australian managed funds of zero. This is contrary to evidence provided by industry experts.

By removing an uncompetitive tax burden on Australia’s funds management industry, Labor’s

plan will make investment in Australia’s funds management industry more attractive, boosting

Australian service exports and Australian jobs. For this reason the policy has been widely

welcomed by the funds management industry.

Myth 14: The Treasurer claims that Labor’s plan to invest $2.7 billion of Telstra shares notionally

allocted to the Future Fund in communications infrastrucuture is raiding the Future Fund, while

the Government’s plans to divert $5 billion from the Future Fund somehow is not.

Reality: Costello’s credibility has been categorically undermined by the Government’s own

financing mechanism for its ‘Higher Education Endowment Fund’.

By taking $5 billion from the surplus that had previously been committed to the Future Fund, the

Government has destroyed any claims that Labor would undermine the Future Fund’s ability to

meet its target of funding public sector superannuation liabilities.

8

SOURCES

Myth 1: Mining Boom

Treasurer, Questions without Notice, Thursday 10 May, 2007.

“There has been a repeated claim from the Leader of the Opposition that the mining boom has contributed $283 billion into the budget over a seven-year period. That is the claim he has been making over and over again. It is that precise claim—not ‘words to that effect’, incidentally—of $283 billion.

“Company tax in Australia is a little over $60 billion. The mining industry contributes eight to 10 per cent of company tax receipts—that is, about $6 billion a year. The total amount of mining tax revenue is not as a result of the increase. Some of that $5 billion or $6 billion would be part of that increase. The Treasury estimate is that the increase in commodity prices over the last four years may well have contributed $11 billion and, over the forward estimates, may well contribute another $11 billion. That will be $22 billion over eight years, as against the claim that the Leader of the Opposition repeatedly makes of $283 billion! He is

only out by a factor of 10, as it turns out. No doubt he will apologise and correct the record tonight. There is nothing like $280 billion. The Treasury estimate over eight years—four gone and four to come—is more like $22 billion.

“Any person who is familiar with the Australian economy would know immediately that that claim of $283 billion could not be true. You would know it immediately by looking at the Commonwealth revenue statement. If you did not know it, your advisers ought to stop you saying it immediately in relation to that particular claim. We are beginning to learn something about the Leader of the Opposition. He has not done his homework. He does not understand the Australian economy.”

Myth 2: Industrial relations and jobs growth

Treasurer, Press Conference, 29 June 2005

“What we need as a country is we need the best industrial relations system that we can possibly get because that is the way you get more jobs and higher wages. I want to make this point - our policy is designed for more jobs and higher wages and the most efficient industrial relations system is the one that produces more jobs and higher wages and that is what we are on about.”

Myth 3: Industrial relations and inflation

Treasurer, Press Conference, Wednesday 6 June 2007

“And I cannot stress enough: any movement away from Australian Workplace Agreements back to collectively bargained outcomes, with unions moving wage claims across the whole economy, could undermine everything. It could undermine this expansion and it would certainly undermine the low inflation.”

Treasurer Address to Victorian State council, Saturday 28 April 2007

“Nothing could be a bigger threat to the Australian economy at the moment than moving away from decentralised wage fixation and going back to the past.”

Myth 4: Foresight and economic management

Treasurer, Questions without notice, Monday 23 May 2007

“But the trick of politics is not [being] able to see what was right in hindsight; the trick of politics is to be able to see what is right prospectively….The important thing inr elation to economic policy is this: it is not what you see with hindsight but what you see down the future.”

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Myth 5: Record on tough reforms

Treasurer, Matters of Public Importance, Tuesday 27 February 2007

The Labor Party would now have you believe that, after they have opposed every tough measure that got us to where we are now….we put in place all of those measures to get this economy to where it is now.

Myth 6: Labor’s tax policy

Treasurer, Doorstop Interview, Hilton Hotel Adelaide, Thursday, 17 May 2007

“The Labor Party announced yesterday that they don’t intend to have a tax policy at the next Federal Election. A political party without a tax policy is a joke. What you are seeing I think is an Opposition that has not done the hard work, that doesn’t have policy, certainly doesn’t have a plan for the Government of Australia and is essentially opting out. To say that it won’t have a tax policy at the next election is a Labor cop out and it’s treating the Australian public with contempt, because the Australian public is entitled to know before the election what the policy is and what it intends to do. And that ought to be announced now so that we can have a proper debate in relation to it.”

Treasurer, Questions without notice, Monday 21 May 2007.

“So if we want to find out what the Labor policy is, we have to look at the coalition policy to work it out, which is why I say to the people of Australia: go to the originators and not the imitators. It was not the Labor Party that thought up moving those thresholds and increasing the LITO and producing tax cuts for working mothers.”

Myth 7: Labor and GST

Treasurer, Interview with Leon Byner, 5AA, Monday, 21 May 2007

“Of course, there is one domino, which if it fell into place, would give Labor a clean sweep of every Government in Australia. All the States, all the Territories and the Commonwealth. That’s if Mr Rudd gets elected and if Mr Rudd gets elected, yes, the rate of GST could go up because for the first time you would have nine Labor Governments in Australia.”

Myth 8: Treasurer’s tax to GDP ratio

Treasurer, Questions without notice, Wednesday 23 May 2007

“Over the last decade Commonwealth tax to GDP has fallen from 22.8 per cent to 20.7 per cent.”

Myth 9: State revenue windfall

Treasurer, Address Menzies Research lecture State Policy Conference, Friday 1 June 2007

“The windfall from the GSt revenue and property taxes has been spent in recurrent expenditures….Despite the states' growing revenue sources, from GST and state taxes, the Australian Government has faced ongoing pressure to expand its role in areas of traditional state responsibility.”

Treasurer, AM, Friday 30 March 2007

“At the state level with the introduction of the 10 per cent GST, state Governments have more money than ever before and a windfall over and above what they would have got if they'd kept their taxes and therefore headroom to deliver on the original agreement which was to abolish all of these indirect taxes.”

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Myth 10: Carbon emission reduction targets

Treasurer, Press Conference, 24 April 2007

“If people are to have draconian targets over short timeframes, have draconian costs in mind.”

Treasurer, Interview Sky News, 1 June 2007

“If you set a target which - for example - would put the Australian economy into recession or cost millions of jobs, as you start to count down to those targets you will have to either give away millions of jobs or give away the target. “

Myth 11: Abolishing State Taxes

Treasurer, Interview with David Speers, Agenda, Sky News, Monday, 21 May 2007

“How many State Governments, now let me ask this rhetorically, I don’t expect you to answer it… how many state Labor governments have cut tax at all let along in 2003, 2004, 2005, 2006, 2007 with a prospective tax cut in 2008? I think it is pretty easy. None of the above. “

Myth 12: Productivity

Doorstop Press Conference, Treasury Place, Melbourne, Friday, 11 May 2007, 9.50 am

JOURNALIST: Mr Costello, Mr Rudd said that productivity will fall to zero when you look at the Budget papers, do you agree? Is he correct? TREASURER: No, again you see, he hasn’t done his homework. It is a nonsense to say that productivity will fall to zero. JOURNALIST: Why? TREASURER: Well, you can look all the way through the Budget papers and you won’t find any figure like that. If he says that, then again it is a nonsense. JOURNALIST: Where do you think he would get that idea from? TREASURER: Who knows?

Myth 13: Witholding tax

Treasurer, Doorstop Interview Parliament House, Canberra Thursday, 10 May 2007

“The only tax cut that he proposed was the tax cut for foreigners. Apparently, he would rather give tax relief to foreigners than to Australians and I think that is a misguided priority.

“That proposal incidentally he has mis-costed, he hasn’t done his homework. That proposal to cut withholding taxes he says would cost $15 million a year, in fact it would cost around $100 million a year. He is out by a factor of six and it illustrates really that you can’t slide through in Federal politics on glib clichés, you have to work hard. Economic management takes a lot of effort and a lot of work and I think tonight what you saw was that Mr Rudd was caught out because he has not done the work and he has not done the thinking.”

Myth 14: Future Fund

Treasurer, Doorstop Interview, Stamford Plaza, Brisbane, Monday, 14 May 2007

“Unfortunately the Labor Party wants to raid our future. They want to take money out of a superannuation fund which they never built and they didn’t have the wit to establish. And that is raiding from future generations. That is stealing from the future.”

Finance Minister Nick Minchin on March 26 2007:

“Certainly this year’s surplus and next year’s surplus will be going into the Future Fund”