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Australia-Israel Chamber of Commerce luncheon, Sydney, Thursday 21 August 1997: address

Leon Kempler, Michael Shur, Bob Hawke, distinguished guests, ladies and gentlemen.

Thank you for the invitation to address you today. I am particularly glad of the opportunity because I have recently returned from a trip to the Middle East. It is fourteen years since I was last in Israel, and I suppose it is no surprise that I noticed a great many changes.

What struck me most forcefully was the substantial improvement in the security climate. This is a hard observation to make when the setbacks to peace in the Middle East remain so obvious and so distressing, but the reality has been one of significant progress over the last decade or so.

Last time I visited Israel, I was arriving from the Arab world. I had to carry two passports and I could not say where I was coming from.

The contrast with today could not be greater. I flew into Tel Aviv from Amman on Royal Jordanian Airlines. I travelled on one passport. In front of me in the plane was a group of Israeli businessmen returning from a holiday in Jordan, travelling on Israeli passports.

Of course, this is what the peace process is all about. It is much more than the guarantor of physical security for the region as a whole, and in a broader sense for the world beyond that region, it is also the foundation of prosperity for the countries of the Middle East.

As Australia's Defence Minister, I was always well aware of the contribution Australia's relatively benign security environment has made to our prosperity as a nation. Israel has, of course, not been so lucky on that front.

Israel's security environment has demanded the diversion of substantial resources from the civil economy into defence expenditure at the same time as it has constrained trading opportunities with the region around it. Potential economic development has suffered as a result.

But today, that potential economic development is increasingly being realised. Israel is one of the pre- eminent economic forces in the region, with a per capita Gross Domestic Product roughly equal to that of the United Arab Emirates and double that of Saudi Arabia.

There is no doubt that further advances in the peace process, bringing with them expanded trading opportunities, will contribute further to Israel's economic development and that of its neighbours.

This is a virtuous circle, because, as we all know, economic prosperity itself goes a long way towards reducing the incentives and increasing the costs of conflict.

If this is the case, then we must already be thinking about how Israel can lock in to the next tranche of economic growth to move beyond the opportunities offered by trade with its own region to expanding trade with the rest of the world.

On this point, it doesn't take much to realise that Israel, along with tha rest of the world, will want to plug into the enormous growth opportunities emerging in Asia. On this front, Israel's ability to develop advanced technology at an affordable price leaves it well-placed to do so.

That much was made clear to me in my meeting with Binyamin Netanyahu in Jerusalem. I took the opportunity to talk to the Prime Minister about the benefits of Australia as a regional base for Israeli firms operating in Asia, and I mentioned to him how our capacity for such a role was made greater by our well developed IT and communications infrastructure. I think it is worth repeating those figures here:

Australia now has more personal computers per head of population than any country in the world and our internet usage ranks second only to the United States. Despite our small population, the Australian information technology industry is the second largest in Asia - and eighth largest in the world - employing 82,000 people with an annual turnover of around $A18bn.

This technological aptitude is a powerful argument for using Australia as the bridge to Asia - whatever our Prime Minister might think on that subject.

There is certainly great scope for Australia and Israel to benefit from such a strategy. I know that Australians are providing the switching for Israel's third telecommunications carrier and in Tel Aviv I met with the Managing Director of an Israeli firm, Total Graphics New Media, which is developing disaster training software in a joint-venture with a Brisbane company, all done via the Internet.

These are excellent examples of the creative new business opportunities flowing from Australia's growing sophistication in IT.

My discussion with Prime Minister Netanyahu also covered the benefits that had been generated in Israel through government involvement in the industry. In Israel's case, their considerable expenditure on defence had produced many information and telecoms spin-offs for the community.

In fact, this meeting crystallised for me some thoughts on the development of the information technology industry in Australia, which I would like to share with you today.

I suppose we should be grateful for small miracles from this Government. One of the recent ones is that John Howard appears to have recognised that IT is an important industry for Australia's future.

Doubtless some congratulations are in order, but it doesn't require any great powers of observation and enquiry to discover this fact:

Australia's ITT export revenue went from $2.6bn in 1994-95 to $3.6bn in 1995-96. These exports have grown at a 28% compound annual growth rate since 1990.

But our Prime Minister might now progress to the challenges facing the industry in the future.

The nub of those challenges is contained in the finding by the Economist Intelligence Unit that "despite having a much higher ratio of scientists, engineers and technicians per capita involved in RD than Singapore or Ireland, our exports of high technology products are less than 10 percent of those achieved by Singapore, and only a quarter of those achieved by Ireland."

This observation neatly defines what I see as a fundamental conflict between the needs of an industry of crucial strategic importance to Australia's economic potential, and the extreme reluctance of the Government genuinely to engage itself to ensure that industry's success.

The fact is that IT can offer much to our national economic strategy.

It capitalises on Australia's established strengths - a high-skill, high- - productivity labour force, and our extensive investment in ITT infrastructure, education and training, and that in an area with a growing share of international trade at premium prices.

The locational freedom of IT production also makes it an ideal industry with which to encourage employment in regional and rural Australia.

Our IT expertise, properly developed, also enhances our attractiveness as a base for multinational operations in the Asian region, bringing employment opportunities with it.

My fear about the current Government is that quite apart from its ability to recognise these opportunities, it will not appreciate or admit that government has a vital role in the future of the IT industry.

The most obvious role for government is the fact that in Australia, the public sector is the largest market for IT services and equipment. Government purchases account for some 40 per cent of the market. This gives government a natural influence over the industry - a bare minimum below which you can't reduce its role, even if you wanted to.

But there are also opportunities for government to involve itself actively in supporting the emergence of IT as a major Australian industry.

Unfortunately, some of the areas where the previous Government had done just this have been wound back by this Government. Cuts to areas such as the computer bounty and the RD tax deduction of 150 per cent mortgage Australia's industrial future in an unforgivable manner, all to achieve a Budget savings task pursued for the most dubious, short-term political reasons.

This is going backwards where we should be going forwards even faster than we were. Speaking as a policymaker in this area. I must say the IT industry is a real challenge for a Government wanting to involve itself. Development in the industry moves so fast, the danger of being left behind as the next innovation carries the industry in a completely new direction is ever-present. If the current Government is ignorant of this, I certainly envy them that comfort, but it is unforgivable negligence in terms of this country's future.

What my discussions with Prime Minister Netanyahu reminded me of is that if we retreat from the sector, we will be the only ones doing so. By one means or another, governments around the world get involved to promote their own IT industries.

In fact, the Israeli experience of the IT dividend from military expenditure echoes on a smaller scale a point made many times about the US industry. The fact is that in the US, despite all the rhetoric about being the home of small government and muscular free enterprise, military expenditure is industry policy by other means.

Whether you supported it or not, the massive increase in defence expenditure under Ronald Reagan generated tens of billions of dollars of demand for IT hardware, software and intellectual input every year.

Given that most of the work was based on long-term contracts with the private sector, IT and communications firms knew that they had time and resources to plan properly and invest in research and product development.

The practical effect of this was a contribution to the technological leadership enjoyed by the US today in the global economy - a leadership which has underpinned a revival of the US economy and America's global political supremacy which had been so thoroughly questioned in the late 1980s.

Today the United States hosts three- quarters of the global software industry and is the home of nine of the world's ten largest software companies.

Now I am not, as many of you might expect, making the case for a massively increased defence budget. But what I do believe this demonstrates is the power of government intervention to develop key industries.

This was one of the goals I had in mind when, as Finance Minister, I set up the Office of Government Information Technology (OGIT).

My plan was that we could combine the IT requirements of various government agencies and use the resultant larger contracts to create critical mass markets for IT. That critical mass could provide the baseload for firms or clusters of firms to leverage new technology to expand into new domestic and export markets.

Essentially, the philosophy was this: Government cannot pretend that it is not involved in the IT industry and that it does not intervene already. That is like hiding an elephant in a mulbery patch - daily commercial decisions of government have a huge impact on the industry. If government cannot make itself disappear, it has a responsibility to try and shape its intervention in ways which will encourage the industry's development.

If you will excuse the colourful metaphor, this Government is not just trying to hide the elephant in the mulberry patch, its mania for contracting out IT services is in some cases cutting off its trunk to spite its face.

Industry insiders have told me that this Government is largely price- driven in striking the contractual arrangements for outsourcing IT. This presents two problems:

Firstly, while the bottom line is crucial, if the arrangements are targeted only at the cheapest possible price, contractors will not have much opportunity for the long-term, high-risk/high return RD Australian IT companies require to keep up with the pack internationally and deliver the most advanced and cost- effective solutions for their client. More accurately, as Gil Thew from SunSoft pointed out in The Australian some weeks ago, the contracts will simply go offshore to the large, established companies and Australian industry will miss the boat entirely.

Secondly, Gil Thew has also made the point that the very long contracts that are being signed, such as the EDS contract in South Australia, provide no incentives for parties to update their technology. As he says: "You cannot expect an overseas outsourcer to say to you, 'Boy, we've got this real new thing, it'll cost you a lot less and we'll make less profit'."

If this practice becomes widespread, not only will government services be dependent on outdated technology, but our information industries will be frozen in time as one of their major sources of demand for new ideas dries up.

This is but one example within the IT industry, and the IT industry is but one example among many. We cannot be preoccupied with IT alone, we must apply the same logic to develop existing industries and grow new ones.

In other words, Australia needs an industry policy which has a vision for all Australian industry.

Instead, in Australia today, we have an industry policy vacuum which reaches to the very highest office in the land. Many would say that in fact it flows from the very highest office in the land.

Let's be clear about this: John Howard is an agnostic on industry policy. Always has been. But the Prime Minister has the curious habit of always delaying forming an opinion until it is served up to him in a poll. You can see it coming a mile off - it is always a case of being opinion-led rather than taking a lead.

The pattern has been the same on industry policy. John Howard derided the idea of industry policy up hill and down dale for 17 months. In particular, he was a very vocal critic of the Labor Party's consistent demands for retaining existing programs and a vision for some new ones.

If you remember, this was all airily dismissed as 'business welfare'. Then when it showed up in the polls as an element in his mounting disapproval rating, he decided to make a speech about industry policy.

To wit, his speech last Friday in Brisbane.

But let's look at that speech: In it he spent a full two pages talking about industry policy before he mentioned manufacturing. He spent two-and-a-half pages talking about industry policy before he mentioned intervention. He then in four separate paragraphs covered pharmaceuticals, cars, the 'supermarket to Asia' and telecommunications intervention and promised in a final paragraph an information technology policy in the near future.

So what was he talking about when he spent over two-thirds of his section on industry policy not talking about industry?

The answer, of course, is that he cycled through fiscal policy, monetary policy, competition policy, education, industrial relations and immigration to name but a few. There is no doubt that these policies are important to industry. They are crucial, but the point is that they are where John Howard really believes industry policy starts and ends. He doesn't believe in an involved Government - he never has - but rather than coming out and saying it, he buries it with words about anything but, masquerading as industry policy.

There is a danger that what will emerge in the Government's response to the Mortimer and Goldsworthy reports will have no real conviction behind it. It will be driven by the bare minimum someone with an eye to pro-interventionist public opinion can sustain.

Suggestive noises are not enough. A committed Government actually has to do something.

More suggestion won't work. It won't work for a very specific reason. That reason is that when the BHP board comes out and says that 2,700 workers are going to lose their jobs when the steel plant closes down in Newcastle, you stand naked before the Australian people if you are a Government that relies on an economics textbook to deliver jobs and job security. You stand back, you scratch your head and you mutter that your economic model didn't tell you that was going to happen.

That plant closure has captured a mood in Australia. It has had a far greater impact on the Australian psyche than any polite debates about industry policy because it could mean the end of what many Australians have regarded as an industrial icon.

It brought into the open people's fears about their vulnerability in a highly globalised economy.

And it showed them that when it came to the crunch, their elected Government was prepared to step back and let a short-term market decision decide whether they would keep their jobs or not.

There can be only two rationales for this: either a narrow theoretical view of the world unwilling to acknowledge commercial realities, or a fear of failure. Labor accepts neither. Industry policy is too important to be abandoned by government.

It is for this reason that industry development is a major section in the draft Platform we will take to the 1998 Federal Labor Conference.

While the detailed policy is still under consideration, let me outline some of its principles:

Industry assistance is not meant to prop up inefficient industries with long- term financial transfers, but to encourage and reward competitive advantage and innovation, both actual and potential.

Industry policy must play to Australia's in-built advantages such as a highly- - skilled and educated workforce, abundant natural resources and an extremely advantageous geographical location in the Asia-Pacific region.

In particular, it must improve our long-term sustainable export performance to overcome our long-standing external imbalances and raise the speed limit to Australia's economic growth.

Above all it is not a desiccated combination of monetary and fiscal settings with a bit of industrial relations reform thrown in. Creating an environment which understands the real-world conditions which attract new investment sector-by-sector requires a dose of vision for industry and a preparedness to get involved and support development in strategic industries - the very things which give business the confidence to invest, knowing that investment has a future.

Israel provides a good example here. The Israeli Government some years ago set up a business incubator program designed to assist in the start-up phase of new businesses based on technological innovation. This program is targeted in particular at often highly-skilled immigrants from the former Soviet Union, thereby leveraging a natural competitive advantage at the same time as assisting immigrants to establish themselves in their new country. A total of 452 projects have been initiated since the incubator concept began in 1991, and these have had a survival rate of over 50%, compared to 10% for similar start-ups elsewhere in the world.

The most important element of this program is its focus on people. Israel's incubator program seeks to address a real social need - the acclimatisation of new migrants - with an intelligent, commercially-focused policy for industry. Equally, we in Australia must not lose sight of the fact that government policy works best when its focus is resolutely on people.

This is why Newcastle, and the insecurity of workers in traditional industries it represents, demands a government response. But it is also why we in the Labor Party are committed to arguing out the new tax debate in ways which address the real concerns of the Australian people.

In the wake of criticism of the last budget, the Government has hastily put discussion of tax reform on the table. Last week the Prime Minister invited Australians on a new adventure in tax reform while placing government work on it firmly in the bowels of his bureaucracy.

The Government joins a mantra that our tax system is on the verge of collapse, citing premiers, business, farmers, taxpayers' organisations all with their various claims. To satisfy all of these claims, and abolish all the taxes people wish to, you would have to strike a GST rate of 20% or more. This is highly unlikely ever to see the light of day. The Government knows a lot of people will need to be disappointed.

Before looking at the need for change, we need to be clear about a couple of things:

Firstly, we are a low-tax nation. Over the three decades from 1965 to 1994, Australian taxation averaged 28.6% of GDP, compared with the OECD average of 34.6%.

Secondly, our balance between direct and indirect taxes is not dramatically out of kilter with most industrial nations. In Australia, about 54% of our total tax take was from income tax; (both personal and company), and 30% from taxes on goods and services. The comparable OECD average was 61% for income and social security taxes, and 32% from taxes on goods and services.

And thirdly, the cry of complexity and confusion is largely a product of a Tax Act rendered over complex by constant amendment to deal with special circumstances. Short of removing these taxes altogether, many of those complaining about complexity may not find themselves better off. When we looked at simplifying business taxes, many urged us to look at Ronald Reagan's business tax reforms. Our calculations were that such a model in Australia would actually increase the tax take, possibly in the order of $1-2 bn.

John Howard says he seeks to lower personal taxes. A laudable sentiment, but the politically sophisticated will be wary of magic pudding solutions. The more likely method is the one we have already seen - a small decrease in income tax for families paid for by a GST and much higher education, childcare and health charges.

Lower personal taxes that were the product of serious efforts to deal with those using clever mechanisms to evade tax, whether by vehicles such as trusts or shifting their income offshore, combined with holding back bracket creep would be welcome. That would be a real benefit to families. Simply to take a feather duster to those exercises while slugging middle income Australia with a GST would be an outrage.

Having said that, we support a public review of our tax system. But we would also make the point that it didn't need a special decree in response to an avalanche of media criticism to do it. A good government makes the task of refining the revenue base an elementary part of its daily duties. We made great changes when in office and the system is fairer for it. Middle income earners in particular experienced substantial reductions in personal tax.

The ALP record is a worthy benchmark. Under Labor, the bottom rate of income tax fell from 30% under John Howard as Treasurer to 20%. The top marginal rate fell from 60% to 47%.

In fact, had income tax rates remained where they were under John Howard, our modelling estimates the income tax take today would be $36b higher than it is.

In any review of the tax system, we would immediately assert two priorities:

Firstly, if this is not to be an elite distraction the review must address the overriding concerns of contemporary Australia - jobs and job security. The Prime Minister asserts that tax change is about creating jobs. That is not good enough. The Government must show the Australian public how.

Secondly, personal taxes must fall as a result of a fairer tax system not trickery. That can only be obtained by ensuring everyone pays a fair share of tax, not by slugging those with little discretionary expenditure - middle income Australia - with the bulk of the indirect tax burden.

A recent study by Professor Patricia Apps of Sydney University showed that the average tax paid on incomes up to $51,000 was higher under any tax reform which introduced a consumption tax in exchange for lower marginal rates of tax. Professor Apps shows that for high income earners (above, say $60,000), the top marginal income tax rate would have to rise by 10 percentage points to see them paying the same amount of tax after such reforms. This confirms again what everyone knows - a GST is inherently regressive.

To me, there is something very 1980s about the tax debate. There is a lot of dusting-off of papers that were out there for tax summits and 1993 elections. As the clouds of dust billow off the old reports, some of us could be forgiven for thinking they are meant to obscure the broader national problems.

Job security, the future of our industries, the quality and character of our education system, the affordability of our health care and the quality of it - all these issues stand high in public concern.

For our part, the Australian Labor Party refuses to be distracted from these issues. John Howard must define the relevance of tax change to those issues or be sidelined in the debate himself. And if he wants to be treated seriously, he must spell out exactly what he means by tax reform rather than containing himself to suggestive, but ultimately evasive rhetoric.

In conclusion. I have been concerned today to put a view of the political debate which draws a bead on Australia's economic future.

In doing so, I believe it is very important always to seek out the real policy commitments, and distinguish those very clearly from what is rhetoric lifted straight from a polling focus group and served up in a speech.

Many of you will have heard the anecdote that the Prime Minister made his decision to freeze car tariffs after asking his Chief of Staff what the newspaper headlines would be the next morning. Regardless of the policy outcome, that process leaves a lot to be desired. It certainly doesn't inspire confidence in the way decisions are made by this Government.

This is why we need to delve behind the rhetoric, asking always whether the logic makes sense, and whether it is consistent with the actual policy framework put in place so far.

We also need to check that policy frameworks are consistent over time. For example, last week John Howard implicitly repudiated his fiscal stance. He is now apparently prepared to compromise his budget surplus to support changes to taxes and industry policy - a budget surplus partly achieved by cuts to industry policy programs in what even the most conservative commentators admit was excessive fiscal tightening.

Now the Labor Party welcomes the Prime Minister's repudiation of swinging cuts to fiscal policy, no matter how belated it might be, but people are now entitled to ask what all the pain and all the accompanying chest-thumping was for in the end result? And they are also entitled to ask what their Prime Minister really believes in.

When the inconsistency is as glaring as this, we are entitled to some scepticism about sudden conversions on industry policy and tax reform.

One point before I close, is on a topic much raised with me when I was overseas - the Government's response to Pauline Hanson's agenda of bigotry and intolerance.

The first point I would make is that it is not simply Pauline Hanson who is the big issue overseas - it is the Government's response to her. For despite the efforts of the Deputy Prime Minister and the Minister for Foreign Affairs, the impression of government equivocation at the very top refuses to go away.

When I was overseas, I sought to defend Australia's record of racial harmony and our 50 years of gradual engagement with the region. I did so in terms that emphasised the fact that our changes on race and on discrimination were in large part driven by directives from our own institutions. It can be a source of great pride to Australians that we have been our own harshest critics.

The challenge now facing the Government and the responses required have rarely in our history been so clear-cut. Our Government must respond with generosity to the stolen children report, must advance the cause of reconciliation and must repudiate racism and intolerance wherever it arises.

But most of all, as Malcolm Fraser said overnight, the Government must join with the Labor Party and pledge to put Pauline Hanson and any of her candidates last on their how-to-vote cards. That way we can be rid of this blot on our good name forever.

Thank you.