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Address to the Life Insurance Federation of Australia annual dinner, Hyatt Hotel, Canberra

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26 MAY 1994



Thank you for the opportunity to speak to you this evening.

I especially want to take this chance to talk about national investment and savings, issues I believe to be of particular interest to you all. But first I would like to talk about the life insurance industry.

Australia's life insurance industry provides the community with two major services. It manages a major portion of household savings and provides death and disability cover to millions of Australians.

On the basis of total assets as at 1993, the industry accounts for about 14% of the financial services sector, and makes a significant contribution to the national economy.

Figures which demonstrate the importance of the industry include:

well over $2 billion paid out each year in death and disability claims and in policy maturities;

total assets of $115 billion, including $78 billion in superannuation;

annual premium income of $21 billion in respect of 10 million policies with an aggregate sum insured of $568 billion.

LIFA, as the main industry body, has a key role to play in representing the interests of the industry. I am pleased to say that I view this relationship between LIFA and the Government as cooperative and constructive.

From time to time we may differ, but we share a common objective of a soundly based and strongly performing life insurance industry.

The Government announced in 1993 its decision to update and upgrade the regulatory regime for the life insurance industry.

These measures are designed to increase the level of transparency and accountability in the operation of companies, and to improve the ease with which the market can assess and compare their performance. We are now implementing these measures.

The legislative framework for new solvency and capital adequacy standards and the financial reporting requirements for the life insurance industry will be introduced as soon as possible.

Remaining measures - essentially consumer related issues - will be introduced as amendments prior to debate on the Bill.



I understand there are continuing consultations between the ISC and L1FA on these and related issues.

Two issues of relevance to your industry on which I wanted to place special emphasis tonight, are the closely related areas of investment and saving.

It is-clearly of considerable importance to our future economic welfare that Australia lifts its performance in both these areas. Business investment and savings were at an historic low as a percentage of GDP last financial year.

But there is good reason to expect that we will do much better in both these areas over the next few years.

As you will be aware, the Government's Budget forecast is for a major turnaround in business investment in 1994-95. This received a sceptical response in some quarters, especially the press, but was strongly supported by some prominent business spokesmen and private sector forecasters.

Yesterday's capital expenditure figures showing a 5% fall in the March quarter has produced predictably alarmist headlines and scare mongering comments from perennial pessimists and political opportunists.

We do not accept these figures warrant such interpretation.

The fact is that the same survey showed that expectations of capital expenditure for the June quarter were for a strong increase, and that the expectations of investment for 1993-94 as a whole are virtually unchanged from the December quarter survey. Thus all that seems to have happened is that the timing of investment has slipped from the

March to the June quarter.

If the ratio of actual investment to expected investment in the June quarter remains around the average outcome of the last five years, the current quarter will see the fastest growth in investment of any quarter since the June quarter 1980.

Achievement of the Government's forecast outcome for investment in 1994-95 will require an increase in the ratio of actual to expected investment above recent levels, but it will require a lesser ratio than the average ratio for the whole of the 1980s - and much less than the peak ratios achieved in that decade.

Moreover, the Government's expectation of a strong turnaround in business investment is not merely based on capital expenditure surveys. It is strongly based on consideration of prevailing business and economic conditions.



For a start, businesses are facing rapidly rising capacity utilisation rates. Although not yet back to peak levels, they are above the average for the period since 1980.

Furthermore, the balance sheet restructuring process, which has been a dominant concern for business in the early 1990s as they sought to correct for the debt binge of the 1980s, is now pretty well over. The prevailing near-record high level of corporate profitability is now available to be used for investment rather than redeeming debt.

The healthy profit share is only one aspect of a set of exceedingly encouraging economic conditions.

These include low inflation - the lowest for 30 years; low interest rates - the lowest since the 1970s; substantial increases in productivity; nominal unit labour costs increasing at a lesser rate than our major trading partners; rising international competitiveness - a 30% improvement in the last 11 years; high levels of business and

consumer confidence - with manufacturing business confidence the highest in 30 years and consumer confidence at record levels; strongly rising employment, which with increasing real wages and real household disposable income is providing a solid basis for increased consumer demand, and an economy already growing at 4% per annum.

All this provides a sound economic basis for new investment decision making.

But the Government has not left it at that. We have also provided business with substantial tax inducements to invest.

Over recent years we have put in place a series of major tax concessions which in 1994-95 will provide a $3 billion incentive to business.

They include:

• accelerated depreciation rates - brought in as part of the One Nation Statement in 1992.

• The Development Allowance for large projects and the more general Investment Allowance - which were brought in as part of the "One Nation" and "Investing in the Nation" statements and which each provide a 10% additional write off

• The 150% research and development expenditure write off - which has now become a permanent feature of our tax system.

• The cut in the company tax rate from 39% to 33% which was also brought in last year.



Together these provide a very significant array of tax inducements to increased investment.

The Investment Allowance is of particular relevance to the 1994-95 investment outcome because to qualify, business will need to have committed its expenditure by 30 June 1994, and to have the investment in place by 30 June 1995. It is therefore a powerful inducement to increase investment next fmancial year.

The Development Allowance is more medium term in its focus, but it is nevertheless highly relevant to the investment outlook in the next several years. Over 500 applications for the Development Allowance were originally received, with a total value in excess of $100 billion. Of these almost 200 have now been registered, the total value of which exceeds $50 billion. The average value of these projects is therefore over $250 million.

To be registered, projects have to meet some stringent tests, including a substantial commitment to completion before July 1996. It is likely therefore that the vast majority of projects which are registered will proceed to completion.

So far, five projects with a value of over $5 billion have proceeded to the final stage of obtaining a pre-qualifying certificate, which entitles them to draw down the tax deduction.

Despite the rejection of some 16 applications for registration and the withdrawal of several others it seems likely that the great majority of the remaining applications will proceed to registration and eventual completion. We can have real confidence therefore that over the next several years many major new investment projects will come on stream and provide a substantial boost to business investment.

Apart from these major tax concessions, the Government has also taken further steps to encourage business investment.

The Budget contains a number of changes to the provisions applying to Infrastructure Borrowings as a means of providing greater incentive to the private sector to become involved in the provision of infrastructure.

We have already seen the development of a number of infrastructure projects with private sector involvement.

For example, toll roads such as the M4 and M5 in Sydney, the Sydney Harbour Tunnel and the Loy Yang B power station in Victoria are all signficant examples of private sector investment in infrastructure.



These and other projects have of course proceeded without the benefit of the Infrastructure Borrowing measure.

However, in a number of cases significant State government involvement has also been necessary, including effective underwriting of some risks.

In some cases the private sector involvement was simply designed to avoid the previous Loan Council guidelines, rather than achieve genuine private sector participation. These guidelines have now been amended to ensure that there is no incentive for this type of behaviour.

The revised Infrastructure Borrowing tax arrangements announced in the Working Nation statement are designed to increase the incentive for genuine private sector provision of infrastructure.

In particular, the new arrangements are intended to increase the attractiveness of this tax incentive to institutional investors such as yourselves, and to make private sector provision of infrastructure a viable option in its own right, without the need for government guarantees.

Changes announced in the Budget extend the sectors for which infrastructure bonds can be used from land transport, sea port, and electricity generation facilities to now also include aviation facilities, electricity transmission and distribution, gas transmission facilities, water and sewerage projects and other water infrastructure.

The tax concession applying to such bonds will also be amended to provide for the option of a tax rebate of 33% as an alternative to the current non-assessable arrangement.

This was specifically intended to make such borrowing more attractive to tax payers with marginal tax rates below 33%, such as superannuation funds. There will accordingly be an additional incentive operating to increase the pool of funds available to private sector infrastructure providers.

Further measures to improve the attractiveness of such bonds include extension of the period for concessional treatment of interest income from 10 to 15 years, relaxing the previous requirement for an issuer of such bonds to own and operate the project for at least 25 years, and passing responsibility for approval, monitoring and management functions from the Australian Tax Office to the Development Allowance Authority.

The involvement of the Development Allowance Authority should enable such borrowings to be promoted and reported more effectively throughout the business



community and the general public. The Government has also implemented a number of measures to facilitate investment in and by small and medium sized enterprises.

Difficulty in accessing both equity and debt finance is a continual concern of such businesses. In the One Nation Statement, the Government sought to address the issue of access to equity finance by developing a tax preferred investment facility for small business called a Pooled Development Fund. In the event, they have attracted little use.

The Government has taken a number of steps in this year's Budget to improve the attractiveness of such funds, including reducing the tax rate for investments in small to medium enterprises from 25% to 15% and increasing the maximum size of businesses in which PDFs can invest from $30 million to $50 million.

Access to bank finance has also been previously addressed by the Government - most particularly by enhancing the capital structure and lending capacity of the Commonwealth Development Bank, and encouraging the Reserve Bank to take an

active interest in the banks' provision of such finance.

In this year's Budget funds are provided to advertise the Commonwealth Development Bank to small businesses, many of which do not know about it and are not referred to it by their normal bank when they are refused a loan.

There are also funds to provide improved training to accountants, business advisers and bankers to enhance their knowledge of the special needs of small to medium enterprises, to assist such enterprises to prepare applications for finance, and to establish best practice procedures for communication between such lenders and borrowers.

The 150% write off for research and development expenditure was also made more accessible for small medium enterprises by a reduction in the threshold expenditure required to qualify for the full concession.

The Government has therefore been very active in seeking to facilitate increased investment.

It has been equally active in addressing the other side of the investment coin - the need to improve national saving. This is especially so as economic recovery proceeds and private investment picks up. As a key player in the management of our savings, the life insurance industry has a particular interest in ensuring that we are successful in this endeavour.



Central to the Government's efforts to increase national saving, of course, is its Budget deficit reduction strategy which will see the deficit reduced to around 1% of GDP by 1996-97, and be well placed to move back into surplus shortly thereafter. As the FitzGerald Report pointed out - the principal step the Government can take to improve our national saving performance is to reduce the Budget deficit.

The Government's commitment to this objective was fully demonstrated by its action in last year's Budget in which it implemented some difficult tax increase and expenditure reduction measures to ensure the deficit would be around 1% of GDP by 1996-97.

Despite having several measures rejected or amended by the Senate, the package finally passed improved the deficit outcome for 1996-97 by PA% of GDP.

In this year's Budget, despite having no increases in taxes, the projected outcome for 1996-97 has been reduced from 1.2% of GDP projected in last year's Budget to 0.9%.

The Government is determined to adhere to its deficit reduction program which is at least as rigorous as that being pursued by any other industrial country that has announced such a program. The United States, for instance, is seeking to reduce its

Budget deficit from 4% of GDP in 1993 to only 2.3% by 1998!

At the same time, the Government has done a great deal to promote private saving: in both the corporate and household sectors.

Of course, our resolve to continue to bear down on inflationary pressures will, by restoring confidence in the future value of money, provide a general incentive to increase savings over the course of the economic recovery now in progress.

The Government's initiatives in reducing corporate taxation have been instrumental in promoting corporate saving. This includes reducing the corporate tax level to 33%, compared to the 46% rate which existed when we first took office, and removing the double taxation of dividends through dividend imputation, as well as the other

corporate tax concessions I've referred to earlier.

Of course, the high profit share now prevailing is also conducive to increased corporate savings.

Our initiatives in deregulating and fostering the development of Australia's equity and debt markets have added to investment choice and broadened the risk/return spectrum, thereby also increasing overall incentives to save.

At the same time, the Government has not neglected the need to promote household saving.



When discussing incentives for household saving, a factor that is quite often forgotten or ignored is our success in reducing marginal tax rates from the high levels that applied when this Government first assumed office. Obviously, however, there are limits to this process when considered against the fiscal imperatives I mentioned earlier.

It is-, nevertheless, the Government's retirements incomes policy - its support for superannuation saving in particular - which is having by far the most profound effect in increasing household saving.

Through the Superannuation Guarantee, we have set in place a process of achieving an orderly increase in the rate of superannuation saving over the rest of this decade. Our initial support for superannuation, and now the Guarantee Charge, has resulted in around 80% of Australia's workers gaining access to the benefits of superannuation saving compared to around 40% a decade ago.

The effect has been to increase the stock of superannuation savings from around $40 billion at the time we assumed office in 1983 to around $190 billion today. It grew by more than $30 billion in 1993 alone.

Of course, not all of this represents additions to national saving. Some of it will have been offset by reduced saving in other forms. By any measure, however, the growth in superannuation saving has been spectacular under the policies of this Government.

In his National Saving report, Vince FitzGerald estimated that the Superannuation Guarantee arrangements would eventually increase total private saving by about 11/4% of GDP.

We should also not lose sight of the fact that other facets of our policies in the superannuation area have enhanced the "quality" of these savings from a national economic perspective. As well as ensuring that superannuation savings are utilised for their intended purpose of meeting people's income needs in retirement, the preservation rules, for example, are also contributing to the accumulation of a large pool of "patient" capital in Australia. In other words, a pool of capital available for

investment in productive projects and enterprises with a long lead time to maturity.

Needless to say, the life-insurance industry and others involved in the management of superannuation savings have been major beneficiaries of the Government's superannuation strategy. With that, nevertheless, must come some responsibilities.

We cannot, in particular, be complacent about the sustainability of our superannuation policy settings over the medium to longer term. As many of you will appreciate, there is a critical need to bolster community confidence in and support for the



superannuation system. This is a task the Government alone cannot expect to shoulder.

The industry must also share in the burden.

As I indicated in my Budget speech, I will be making a statement on superannuation during the current Budget Session of the Parliament, which ends on 30 June. As well as responding to the superannuation matters outstanding from the FitzGerald Report, this statement will include the Government's decisions on measures required to address the so called "small amounts problem".

This problem has undoubtedly been one of the most important factors contributing to the low regard with which superannuation is held by significant sections of the community. Indeed, it is simply untenable that people can be forced into a situation of loss on what is effectively a part of their wages or salaries.

There has already of course been a great deal of discussion between the Government and the industry on ideas for resolving this issue. I believe in fact that there is now a great deal of common ground between all interest groups on the package of measures

required and I am confident that we can achieve a satisfactory outcome in this regard in the next few weeks.

I look forward to support from LIFA members in making that possible.

The FitzGerald Report on National Saving examined the issue of establishing new tax incentives for private saving, outside of - and in addition to - the existing system of tax advantages for superannuation saving.

Dr FitzGerald warned that in this area, matters are not as straightforward as they may appear at first glance.

He said, and I quote: "There is little doubt that tax advantaged savings vehicles attract large amounts of savings. However there is a question mark over whether they are better at attracting new saving rather than just existing savings, and an even bigger question mark as to whether the additional saving outweighs the cost to Government

saving." (page 70 of Report)

Dr FitzGerald went on to say that: "The findings of overseas studies on the impact of such schemes on private and national savings are equivocal".

For that reason, the FitzGerald Report recommended that the Government give priority to its medium-term deficit reduction strategy as the most reliable policy tool for boosting Australia's national saving performance.

But FitzGerald did not totally dismiss new tax incentive systems for private saving.



He recom mended, and again I quote: "That in the medium term, when the Government fiscal position is stronger, and the introduction of a scheme that involves revenue deferral ..... can more readily be contemplated, a new ....... financial saving vehicle, applicable to a range of life cycle purposes, should be introduced".

Last August, in the Government's response to the FitzGerald Report, the then Treasurer confirmed that over the immediate future, priority would be given to the budget deficit reduction strategy.

He also stated that once substantial progress had been achieved on that front, the issue of a new type of tax advantaged saving vehicle - as proposed by FitzGerald - would be given appropriate consideration.

That continues to be the Government's stance on this issue.

In the meantime we are continuing to examine various possible approaches with a view to the eventual introduction of the most cost-effective arrangement.

- However, in the recent Budget the Government did take steps to encourage savings by employees through genuine employee share acquisition schemes.

Previous arrangements which provided tax exemption to employer discounts for employee share acquisition schemes had not been utilised due to a number of unattractive features. The discount was limited to 10% of the share value and a monetary amount of $200 per annum, it was not deductible to the employer, and it was clawed back by the capital gains tax on sale of the shares.

Under the new arrangements, the discount on the shares can be increased to $500 per annum, and can be up to 100% - so the employee need pay nothing, the discount is not clawed back by capital gains tax on sale of the shares but it is deductible to the employer.

These arrangements offer a real prospect of substantial spread of employee share ownership which the Government would like to see for industrial relations reasons as well as to increase private savings.

At the same time, the Government sought to limit what it saw as inappropriate use of tax deferral arrangements for employee share ownership, which were not necessarily confined to the employee's own company, were open ended as to the amount of discount that could be involved per annum, and open ended as to the period of tax deferral.

In restricting these tax deferral schemes the Government was certainly not seeking to restrict genuine employee share ownership which, for ordinary employees, is still quite



attractive under tax deferral provisions and much more attractive under tax exemption arrangements.

From all that I have said this evening it can be seen that the Government has implemented a vigorous program of support for levels of investment and saving necessary to support high levels of economic growth.

I would like to take this opportunity to mention LIFA's outgoing chairman, Mr Ian Salmon, who is retiring from a full time role in the industry later this year.

As Managing Director of the AMP Society for the past three or so years, as well as in his role as LIFA Chairman, Ian has made a major contribution to the industry during a time of substantial pressure and significant change.

Ian has been forceful and resolute in promoting the views of the life insurance industry, and has displayed the commitment and conviction which follow from almost 40 years insurance experience in several companies and countries.

It is unfortunate that Ian isn't with us this evening and I wish him a speedy recovery. I hope his retirement will be productive and enjoyable.