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"Fightback" - Setting the record straight Mr Willis' wrong assertions



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Ύ Ο

Peter Reith

DEPUTY LEADER of the OPPOSITION PRESS RELEASE SHADOW TREASURER

Bulletin No 35 ~

JOINT STATEMENT BY PETER REITH MP, SHADOW TREASURER AND SENATOR JIM SHORT, SHADOW MINISTER FOR FINANCE

"FIGHTBACK" - SETTING THE RECORD STRAIGHT

MR WILLIS' WRONG ASSERTIONS

Mr W i l l i s , the new Treasurer, claims that the Coalition has an "arithmetic hole" in its Fightback package.

That is a bit rich from a government that only a few weeks ago released an economic and employment mini budget that had a minimum of $600 million in unfunded spending increases.

It's also a bit rich from a failed former Finance Minister who oversaw a $13 billion turn-around in the Commonwealth budget in just one year - ie from a prospective $8.1 billion surplus in 1990/91 to a $4.7 billion deficit in 1991/92.

Not much credibility there, Mr Willis.

The Coalition totally rebuts the assertions by Mr Willis that there is a "hole" in Coalition figuring. The Government promised a demolition job using new heavy artillery and all we got was a pop-gun.

Attached is a detailed response to Mr Willis' taxpayer-funded attack on the Coalition's Fightback package.

In summary, howe v e r , each area of the Government's principal points of attack are simply wrong, or incorrectly based on different assumptions to the Coalition. In particular:

. The Government has made a simple, but major, error in its

costing of the Coalition's GST social security compensation package. As noted in detail in the Attachment to this press release, the Government has erroneously measured the 1990-91 costings for these

social security programs by using 1991-92 figures.

. The Government's costing of the Job Search Allowance savings is based on erroneous assumptions that conflict with the Coalition's, as outlined in the Attachment.

COMMONWEALTH 1 PARLIAMENTARY LIBRARY t fvllCAH j

. The Medicare costings are again based on erroneous

assumptions - in conflict with those made by the Coalition. In fact, for our health changes the Coalition obtained a second independent opinion which shows our costings to be conservative.

. The loss in dividends from privatisation of government

business enterprises is, contrary to Government assertions, fully accounted for in the Fightback package.

. The so-called discrepancy in Public Debt interest savings asserted by the Government is incorrect. The Coalition stands by its numbers and asks the Government to go back and do its numbering again.

. Again, the Government asserts that the Coaiition would have a $193 million shortfall in savings in the Administrative Services area. The Government has adopted an incorrect methodology, as outlined in the Attachment.

Mr Willis hasn't even come close to denting the Fightback program. The Coalition spent 18 months preparing a detailed package and it is noticeable that the Government's response - even with all the bureaucratic resources at its disposal - has

been rushed in a panic move to shore up the Prime Minister's teetering leadership.

How can he even come close to touching our package when we

haven't even taken account of the enormous incentive effects that would be unleashed by the Fightback program?

As noted in the Fightback document, the Coalition has grossly under-estimated the prospective benefits and over-estimated the CPI effects of the package.

For example, no account has been taken of the increase in competitiveness of the Australian economy that would result. Calculations done for the Business Council of Australia on the ORANI economic model show that the scrapping of the wholesale

sales tax and its replacement with a GST alone could boost GDP by up to 1%, or around $4 billion. This change alone could boost revenue collections by some $800-900 million - none of which has been taken account of in the Coalition's figuring.

No account has been taken in our package of the positive employment effects of a massive reduction in personal income tax and associated marginal tax rates. Academic literature from both overseas and Australia clearly shows that a

reduction in personal income tax does have a positive effect - and that this translates through to higher income tax receipts.

Indeed, studies show that between 20% and 40% of the initial cost of the income tax cut will be recouped by an increase in employment and the incentive to work. Even just a 10% clawback from the Coalition's proposed income tax cut would

see a $1.2 billion increase in revenues above what we have estimated.

In addition, apart from the positive impact of income tax cuts, academic literature suggests that significant efficiency ga i n s , and ultimately revenue gains to the government through expansion in the economy, will result from the Coalition's expenditure cutting program.

Work done in Australia by C C Findlay and R L Jones in the

early 1980s and published in the Economic Record suggests that the efficiency losses of government spending programs in Australia can range between 23% and 65% of the revenue spent. This work would, therefore, suggest that the Coalition's

$3.9 billion expenditure cutting program would generate additional welfare gains for Australia of between $920 million and $2,600 million in 1990-91 dollar terms. That is over a 0.6% increase in GDP, and possibly more than $600 million in

increased taxation collections.

Finally, the Coalition's entire reform package, including a bold plan of accelerated micro economic reform should, as described elsewhere in this paper, boost Australia's long term GDP by several billion dollars.

As explained in the Fightback documents, the one-off CPI effect of the taxation reforms would be 4.4%. However, as also noted, the Coalition believes that this is a very conservative estimate of the actual CPI effect. Many authoritative commentators consider the non-farm GDP deflator to be a more accurate measure of inflation. The once-only price impact of the package as measured by the non-farm GDP deflator would be 2.2%.

This limited response from the Government is not nearly enough to stem the leadership instability within the Government's ranks. Ralph Willis will have to do a lot better if he wants to avoid doing a "John Kerin". ,

9 December 1991 Canberra

Contact: David Turnbull (06) 2774277 D172/91

ATTACHMENTS

1 INCOME COMPENSATION

2 JSA AFTER 9 MONTHS

DISABILITY SUPPORT PENSION

3 WAITING PERIODS FOR JSA

RESTRICTING PENSION ELIGIBILITY FOR WIVES OF DISABILITY SUPPORT PENSIONERS

SOLE PARENT PENSIONERS

4 HEALTH

5 PRIVATISATION - LOSS OF DIVIDENDS

6 PRIVATISATION PROCEEDS (PUBLIC DEBT INTEREST IMPLICATIONS)

7 ADMINISTRATIVE SERVICES

8 ATTORNEY-GENERAL AND JUSTICE

9 TOURISM AND AVIATION

10 TELECOM DEBT REPAYMENT

Attachment 1

Income Compensation

Either the Government has not understood the compensation arrangements outlined in the "Fightbackl" Package or it has deliberately misrepresented those arrangements.

The Government's claim that compensation will cost $317m more than the estimate of compensation in "Fightbackl" rests on the false assumption that the "Fightbackl" estimate is for 1991-92.

This overlooks the fact that Chapter 10 of the "Fightbackl" document dealing with compensation is written in .terms of 1990-91 magnitudes, consistent with the GST and related tax changes, all of which are estimated in terms of 1990-91 dollars. It hardly

requires the Department of Finance to point out that the cost of compensation would be higher in 1991-92 than in 1990-91, both because of inflation and because of the blowout in unemployment caused by the failure of the Government's economic policies.

Revenue from the GST, however, also would be higher in 1991-92 than in 1990-91. It makes no sense to cost one component of the Package in terms of a later year than other components of the Package.

The "Fightbackl" tax and compensation costings are all in terms of 1990-91 magnitudes and 1990-91 dollars. 1990-91 was chosen because it was the last full financial year for which data is available. The "Fightbackl" costings, therefore, are consistent and it is fanciful to suggest that there is a hole of $317m if

just one part of the "Fightbackl" Package is re-estimated on a 1991-92 basis.

If the Government would like the "Fightbackl" Package to be re­ estimated in the dollars of the day for 1993-94, 1994-95 and 1995-96, then let it produce economic forecasts on which such estimates should be based. This would force the Government to come clean on where it thinks unemployment will be by 1993-94 as

it flounders around in search of an alternative strategy to that set out for Australia in the "Fightbackl" Package.

ATTACHMENT 2

JSA AFTER 9 MONTHS

The Government acknowledges the accuracy of our assumption that 80% of JSA recipients will proceed to special benefits after 9 months.

However it then proceeds on the basis that our savings will only result from recipients participating in the Austrain program which it claims is both administratively cumbersome and will have a significant displacement effect.

Each of these assumptions is wrong.

Our savings are based on a combination of events:

- failure to satisfy the JSA activity test /

- failure to satisfy the hardship test * failure to satisfy a tighter special benefits assets test - increased employment activity in years 2-3 as a result of the emerging economic recovery

Moreover the Government’s pessimistic view of the effectiveness of Austrain is both short sighted and politically motivated.

The Government already has very similar programs such as TASK and Job Skills which it claims it has been able to introduce without significant administrative costs or constitutional difficulties. In addition the Government chooses to ignore the operation of our proposed local employment boards which, together with employers, will bear the bulk of any administration costs. These boards will be required to monitor and if necessary, refuse to sanction employment arrangements which are simply likely to lead to job displacement or churning.

The fact is that the Government does not want to acknowledge that there is likely to be a very positive response from both potential employers and potential employees. Its assumptions assume a stagnant economy and no savings from those ineligible for special benefits due to its tighter assets test.

DISABILITY SUPPORT PENSION

The Government's costings assume an overall cancellation rate of 3% - 2% from annual medical examinations and 1% from mobile review teams.

It is careful to insert the disclaimer that its figures are based on advice from DSS. This is a fatal assumption because DSS's track record has allowed an explosion in numbers of recipients - 66% over the last 10 years. The introduction of mobile review teams for sole parents and unemployment beneficiaries has had a much greater success rate than the 1% claimed in this area. DSS does not propose to undertake systematic testing of those already on the pension and the blow out figures make it clear that there are significant gains to be achieved on this front alone.

The Government concedes that the cost effectiveness could be improved by a concentration on those with lower levels of impairment, ie under 30%. The Coalition's approach does not require testing of those with manifest disabilities and will be sufficiently flexible to capture much more than the gains conceded.

2

ATTACHMENT 3

Waiting periods for JSA

The Dept of Finance claims an overestimate of savings from this initiative of $75 million. It does this by assuming a higher leakage onto special benefits than the Opposition, and does so on the basis of current leakage to special benefits under the existing waiting period.

This assumption is completely rejected by the Opposition. The current leakage of 20% is too high, and in fact, DSS'

administration of special benefits is currently the subject of a diagnostic study by the Auditor-General.

Restricting pension eligibility for wives of disability support pensioners

The Dept of Finance agrees with the proposal to restrict pension eligibility to such wives. It says:

"Payment of pension to all wives of DSPs, regardless of the extent of their role as a carer, runs counter to the direction towards an "active" income support system encouraging labour force participation where

possible."

In order to claim an overestimate of savings in this area,

Finance has had to rely on dubious assumptions regarding

displacement effects - assumptions for which Finance provides absolutely no basis.

Sole Parent Pensioners

Finance agrees with the Coalition's intention to replace the sole parent pension with the JSA when the youngest dependent child reaches the age of 12. In its policy implications, Finance says in what will prove to be an embarrassing rebuff to Senator

Richardson:

"The proposal would address recognised work

disincentives, particularly for part-time work, facing sole parent pensioners and would be consistent with the direction of policy in recent years towards lower dependence on income support."

Finance's alleged savings overestimate for this proposal appears largely derived from spurious assumptions regarding displacement effects as sole parents return to work - assumptions for which again, it presents no sound basis.

Attachment 4

Health

The Government's calculations on health are based on a number of demonstrably false assumptions.

1. Extra Administrative Costs

These relate to losing the efficiencies inherent in the mass processing of bulk billed claims from doctors.

The Government has apparently ignored the reduction in the number of claims which will be made as a result of the abolition of bulk billing.

If fewer claims are processed, then clearly overheads will fall.

That fewer claims will be made as a result of "Fightback!" is indisputable.

In the Macklin Background Paper No. 5, Professor Richardson says:

"Co-payments have a significant effect upon the "demand" for services. In the absence of any other influence,

co-payments of 25-30 per cent could reduce demand by as much as 25-28 per cent."

We have also addressed the other factor impacting on demand raised by Professor Richardson, namely the oversupply of doctors.

2. Changes to Medicare Benefits

The savings calculated by the Government factor in a 3 per cent net reduction in medical services to non card holders as a result of the changes to bulk billing and rebate levels. The

Government's lesser changes involving smaller co-payments were calculated in the Budget papers to produce a reduction in usage of 7 per cent!

As stated above many authorities believe that the true figure is much higher.

The Government has also ignored the significant impact of the "Fightback!" proposals on specialist medical services.

3. Shift to Private Insurance

The Government has made two incorrect assumptions in this regard.

Firstly, although the document is ambiguous, it has apparently calculated the savings on the amount paid per bed day in public hospitals by private insurers - around $180 per day. The true cost of a bed day in a major public hospital is $500 - $600 per day. We used a conservative figure of $350 per bed day. This

therefore makes an allowance for such overheads as teaching and research and for extra costs resulting from the increased turnover to reduce waiting lists.

The Government has also assumed that individuals will now take

out basic rather than higher levels of health insurance. They have not allowed for the lowering of premiums which will occur when large numbers of young healthy people enter the insured pool (as confirmed by the VHIAA in a press release dated December 2

1991) .

The health proposals were costed by two independent authorities - and checked by a third. The costings used were the most

conservative ones. The Coalition stands by these costings.

Attachment 5

Privatisation - loss of dividends

The Coalition completely disagrees with the analysis of the Government as to the treatment of the loss of dividends in the Fightback package.

It appears that the only thing that Finance have got right in this area is to note our comments on page ^ 325 of the Fightback taxation and Expenditure statement. That is:

'It is also worth noting that as a consequence of ownership shifting from the public to private sector, dividend receipts to the government from privatised assets will be reduced. Over time, this will be offset by an increase in company tax revenue.

However, to the extent that there is a net loss to the budget during the transition period increased receipts from corporate tax on profits flow in, the three year program outlined in this chapter will enable any shortfall between decreased dividend receipts and public debt interest savings to be adequately covered.'

The clear understanding is that the Coalition's privatisation figures are net of the loss of dividend proceeds in the year of sale. The bottom line of privatisation proceeds easily cover any small loss of dividend income.

Obviously, this loss of dividends will be an ongoing reduction in receipts for the years after privatisation. However, the overwhelming evidence from overseas is that the privatised companies become much more efficient and profitable, and that the government will recoup far more from the increase in company tax collections than it would otherwise have collected from dividends.

Otherwise why would a government proceed with privatisation?

Why would the present Hawke government be privatising Qantas and Australian Airlines, for example, if it does not expect those bodies to become more efficient in the process?

It is ludicrous for the Government to be effectively saying that because they cant quantify an increase in profitability it will not occur.

Indeed, the Coalition's position is backed up by overwhelming overseas experience.

Attached are a table and graph showing the UK privatisation experience. It shows unequivocally the increase in profitability of privatised government business enterprises.

For example, most Australians will be aware of the turn around of the inefficient debt ridden British Airways to its place today as one of the, if not the, premier passenger airline in the world, after it was privatised.

The Government has displayed a monumental act of inconsistency.

It is worth noting in the Department of Finances response to the Economic Action Plan in 1989 this issue did not raise a mention. This just goes to show the Government has been forced to scrape the bottom of the barrel in a desparate attempt to find some chink in the Oppositions armour.

Privatisation - The Australian Way

Figure 2

mam wifoemance of pewathseo companies Year 0 is Last Year Before Privatisation

700

600

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500

400

300

200

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AMERSHAM INTERNATIONAL

Ι · Ι · Ι · Ι · ! · Ι · Ι · BRITISH AEROSPACE

■ ■ ■ ■ ■ ■ ■ ■ ■ I BRITISH TELECOM

% s s s BRI TI SH AIRWAYS

■ ■ ■ ■ ■ ■ ■ ■ ROLLS - ROYCB

100

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- 1 0 1 2 3 4

YEAR ΓΝ RELATION TO PRIVATISATION :

Years of Privatisation : British Aerospace, Cable and Wireless - 1381; Am era ham. National Freight Consortium - 1982 ; ” ' ' ·~οα r , for Hr-. f.\ h Aerosneca and Rolls Rnvce are f'

< FR I > 1 2 . 0 6 . ’91 Ι5ι33 NO . 25 PAGE 3

BZU.A CORP 02 2595728

BARCLAYS de ZOETE WEDD A U S T R A L I A L I M I T E D

PRIVATISATION & CORPORATISATION

CAPITAL RAISING CONFERENCE

SYDNEY

SEPTEMBER 1989

AN EQ UITY FUND RAISING V IE W

A paper prepared as at September 1989

Barclays de Zoete Wedd Australia Limited

A ME '.lSER OK THE BARCLAYS GROVE

255 GEORGE STREET. BOX 4675 GKO SYDNEY 2001 AUSTRALIA.

TELEPHO NE(02) 259 5711. TELEX 12182S. FACSIMILE (02; 2595777. D X 10421 SYDNEY STOCK EXCHANGE.

SYDNEY. MELBOURNE. BRISBANE. LONDON. NEW YORK,TOKYO, AUCKLAND. HONG KONG, SINGAPORE, AMSTERDAM. MADRID

by

Richard Mews (Head of Corporate Finance) and Barney Berold

(Director Corporate Finance)

Prepared in Conjunction with:

Simon Mordant Nicholas L. Wagg Richard Elmslie

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APPENDIX 1

PROFIT PERFORMANCE OP PRIVATISED COMPANIES PRE-TAX PROFITS IN POUNDS MILLION

Company (Year of privatisation)

Post-privatisation

1981 1982 1983 1984 1985 1986 1987 1988

British Aerospace (1981) 70.6 84.7 82.3 120.2 150.5 182.2 161.0 -

Cable and Vireless (1981) 64.1 89.2 156.7 190.1 245.2 295.0 340.5 356.1

National Freight Consortium (1982) 4.3 10.1 11.8 16.9 27.2 37.0 47.4

Jaguar (1984) (31.7) 9.6 50.0 91.5 121.3 120.3 97.0

British Telecom (1984) 570.0 936.0 1031.0 990.0 1480.0 1810.0 2067.0 2252.0 British Gas (1986) 743.0 1106.0 1185.0 992.0 1100. o ' , 1290.0 1255.0

British Steel (1988) (1013.0)(492.0)(866.0)(253.0)(387.0)

1

42.0 177.0 419.0

Pre-privatisation

BARCLAYS DE Ζ0ΕΤΞ VEDD LIMITED

Attachment 6

Privatisation proceeds(public debt interest implications)

The Coalition rejects the assertions by the Government that the public debt interest savings due to the reductions in public debt funded by privatisation proceeds would be less than those shown in the Fightback Package.

The Government has not revealed its calculations to show how they arrived at their numbers and merely assert that their numbers would be less than the Coalition's.

The Coalition simply disagrees with the numbering of the Government.

Indeed the Coalition has greatly underestimated the full PDI savings from its Taxation and Expenditure package. We have, for example, not included in our calculations the savings that we accrued from the reductions in the Budget deficit that would occur due to any savings above and beyond privatisation proceeds. These savings would also be used to reduce public debt.

These savings are well over $50 million during the 3 year Fightback Package.

Attachment 7

Administrative Services

The Opposition's savings from rationalising and contracting out the services of DAS are based on the 1991-92 Budget structure and - estimates. The reference in the Finance document to the

realisation of savings from commercialisation, in most cases by 1993-94, is therefore irrelevant.

Any savings realised by the Government subsequent to the release of the "Fightback!" document will also be available to the Coalition upon coming to government.

The Department of Finance also appears to have misinterpreted the basis of savings achievable from contracting out. As stated in the "Fightback!" document, empirical evidence (from the Industry Commission, Domberger and Rimmer) shows that conservative savings

in the total cost of service provision of 20 per cent are

achievable. The Department of Finance has only conceded savings with respect to running costs, but savings from total costs would be achieved.

The Coalition therefore stands by its projected savings of $100m from commercialisation in year one and the additional $120m from contracting out remaining services in year two and remains committed to the commercialisation and contracting out of all these services included in the Administrative Services portfolio

listed in "Fightback!".

-.V « .

Attachment 8

Attorney-General and Justice

In the 1991-92 Budget, the Government announced real increases in funding for legal aid commissions of $3 m plus another $2.5 m increase for community legal centres. The Coalition is

committed to the maintenance of spending for legal aid recipients -­ however savings will be achieved from paving back the increases foreshadowed in the Budget and streamlining the administrative side of legal aid funding. The $10 m saving announced by the Coalition in Fightback is easily attainable.

The savings from greater contracting out of courts building services are based on the Budget estimates for 1991-92. The Coalition is aware that funding under this category varies from year to year, however, in common with all expenditure reductions,

1991-92 has been used as the basis for calculating savings. The Coalition believes that the use of genuine competitive tendering in the construction industry can yield significant savings.

While the Finance document purports to claim that the Coalition's planned savings in the administration of justice/national protective security areas are overstated, it supplies absolutely no support for its own estimates of savings. Moreover, in the

1991-92 Budget, spending on the administration of justice (excluding court building services) grew by almost 20 per cent. The Coalition's saving represents about half of this increase.

Attachment 9

Tourism and Aviation

The Finance document does not question the Coalition's savings from the rationalisation of tourism services.

On full cost recovery for air safety activities, the Finance document states that the Government will begin to realise the Opposition's planned full cost recovery in 1993-94. The

Government's record on this issue has already seen one deferral of implementation in twelve months.

Once again, the Department of Finance has ignored the fact that 1991-92 is the base year for these savings.

Attachment 10

Telecom Debt Repayment

The Finance document claims that the Coalition cannot claim the early repayment of Telecom's debt because the Government has since decided to replace $2 billion of that debt with equity and to accelerate the repayment of the remainder of the debt. This point is irrelevant. We have based our costings on the Government's own 1991-92 Budget figures. The Government's claim also ignores the fact that the Government's decision will increase the final sale price of Telecom under our privatisation program.