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Newcastle businessmen's club luncheon



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ADDRESS BY THE LEADER OF THE NATIONAL PARTY, IAN SINCLAIR, A NEWCASTLE BUSINESSMEN'S CLUB LUNCHEON, TATTERSALL'S CLUB NEWCASTLE, 24 SEPTEMBER 1985. .

Mr Chairman, ladies and gentlemen.

Thank you very much for inviting me to speak here in Newcastle this morning.

For the last few days, the Treasurer has been travelling the country trying to sell the tax package he announced

last Thursday.

I am glad it's him, and not me.

The people like you - the people of the private sector, who make this country work - have tax reform coming out of your ears.

For months, you have been hearing about it.

Now the Treasurer has announced it.

And it seems as if every expert in captivity has been trotted out to give an opinion and an explanation.

The details of the package have already been given in great detail, and everyone is - or should be - pretty much aware of where they stand, so I won't go into them further today. -

There are some points I think must be made, however - because they are vital to you, to the private sector, all around Australia.

The first is that the Government's tax package is out of touch with reality.

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The second is that it is a leap in the dark, with effects in many areas that no-one can hope to predict.

The third is the most important, however.

There is a real and growing danger that the Government's tax package will trigger a major crisis in the rural sector.

I do not say this lightly. .

I say it because government at all levels, and Australians generally, must know what.is going on - and try to halt it.

Before dealing with this matter in more detail, however, I want to turn to the first two points I made: that the tax package is out of touch with reality, and in many aspects a leap in the dark. ·

Both points lead to the third, because they show h

That is what is starting to happen now.

It is happening in the rural sector because the rural sector is - with mining - the least protected sector and the sector most open to international competition, and because the rural sector comprises a very large number of small,

independent producers.

But everyone should be very clear.

• "x_, · . · .

The gun-barrel farmers are looking down now is the same barrel that all industries will start to see pointing at them within a relatively short time - unless there are some ~ fundamental policy changes.

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It is a matter of economic reality.

The Government cannot have it both ways.

It cannot claim crtedit for realistic and worthwhile reforms in the financial sector if it ignores the realities of wages policy.

Wages are the key. _

We are living beyond our means, we are paying ourselves too much, and because of the cost of that, we are borrowing too much. .

In the end, we will all have to suffer as a result.

Unless and until we do something about these fundamentals, we are wasting our time.

The whole issue of tax reform is classic example.

The issues are fairly simple: greedy Governments are taking more and more of people's money, and because of our dependence ό„η direct taxation and the failure of Governments to index the tax-scales, ordinary wage-earners are hitting

the marginal rates that only the highest-paid were once expected to face.

Results? Massive evasion and avoidance, massive discontent, massive lack of incentive.

That is clear to everyone except the most woolly-minded inhabitant of Canberra's many ivory towers.

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Instead of attacking the central issue - government spending the Government embarked on an exercise in deckchair rearranging. . .

Its hastily-organised tax summit was almost as hastily abandoned when it was clear that competing interests represented there could hardly agree on the time of day, let alone the location of the deckchairs.

Then the public servants, who set the agenda by drawing up the white paper, were given the task of tidying up the mess.

The result was predictable.

I would not go so far as to say the whole thing was a public service conspiracy, but as far as I can work out, among the few people who will be ahead as a result of it will be public servants - especially highly-paid public servants.

They will not be affected by the tax on fringe benefits, . because they have very few anyway, and the Commonwealth will pay the tax on them in any case - which in itself is ridiculous. -

Travelling allowances, the really vital perk, are untouched.

And the planned reductions in marginal tax rates will offer real gains to the more highly paid - and most are well above average.

Just about everyone else will be slugged - with business bearing the brunt of the costs.

The one bright point is the end to the double taxation of dividends, but even that is going to have a shakedown effect as the ramifications spread through business.

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Nevertheless, it is welcome. ■

The previous Coalition Government moved to end double taxation of dividends, by making the first $1,000 of dividend income tax deductible, but this was reversed by the incoming Hawke Government.

It was good to see the change of mind on this issue.

With that exception, however, the tax package imposes a heavy burden on business. ■ .

Small business, which is so important here in Newcastle and throughout Australia, will be hit hard.

The new capital gains tax, in particular, will act as a brake on enterprise in small business.

It seems relatively soft now, at least in comparison with . earlier proposals, but everyone will understand how its effect will mount with each year.

Anyone starting a small business now with the intention of selling out five or 10 years ahead will pay a heavy cost.

The incentive for this in many cases is the reward from the

sale of what could be called the goodwill.

But in the case of a business started after last Thursday, the whole of that goodwill will be subject to the new capital gains tax - and at marginal rates.

I think it would be safe to predict that the rate of growth of new small businesses is going to take a sudden dive.

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That is an example of how far removed from reality this new tax package is.

It is also an example of how much it is a leap in the dark.

The Government's projections on the fiscal impact of its tax package depend critically on its forecasts of income from measures such as the tax on fringe benefits and the new capital gains tax.

As was pointed out in a Financial Review study yesterday, however:

" ... the estimates provided and the whole highly optimistic outlook rest on particular theoretical assumptions, which are not even acknowledged, let

alone qualified." .

I would have thought it would have been obvious that when one tax loophole is closed, others are eagerly explored, and the likelihood is that the real gains in government revenue arising from the new taxes are likely, in most cases, to be shortlived.

This process will be accelerated by the fact that the cuts in marginal rates which are supposed in many cases to be the "sweeteners" for those hurt by the new taxes will not even start to come into effect for a year.

It is cynical but realistic to make two observations.

The first is that this whole package rests on pretty shaky fiscal ground .

The second is that if the ground wobbles too much, there is plenty of time for the Government to change its mind about the cuts in marginal tax rates.

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The full cuts in marginal rates will not come into operation for two years, and that's a very long time in politics.

Just in passing, we should also note that because of fiscal drag, even the promised marginal rate cuts will mean very little to most taxpayers. .

Figures published yesterday showed that when the cuts are in full effect, workers on average weekly earnings will probably pay more of their wages in tax than they do now.

Many workers will be little better off and those on around $200 a week will hardly notice any difference at all.

The marginal rate changes are virtually a form of tax indexation - they only put off the evil day, they do not solve the real problem.

That brings me back to the issue I spoke of earlier - the rural crisis - and the real issues that are at stake here.

I said earlier that the basic issue was wages.

The tax package is not the cause of this looming rural crisis.

It is, however, shaping up to be the last straw, the trigger that will unleash the forces that have been building up more and more strongly.

To understand why, we need to go back to the present Government's historic decision to float the dollar.

The groundwork for that decision had been laid by the previous Coalition Government, but Labor took the decision, and I give them full credit for it.

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What the decision meant, however, was that for the first time, the world was able to pass judgement, directly, on the Australian economy.

Instead of acknowledging that, the Government remained committed to policies with which it might have got away pre-deregulation, but were right out of line in the new environment.

The major.such policy was on wages - and under the Accord, with its commitment to automatic, full indexation, we went on overpaying ourselves.

The crunch came when the Government's fumbling with United States requests for assistance in testing the MX missile triggered an international reappraisal of our economy.

The world did not like what it saw, and the Australian dollar dropped through the floor. ,

Since then, the thrust of Government policy has been to juggle these two imperatives: its commitment to maintaining real wages, under the Accord, and to keeping the value of the dollar from dropping even further.

The devaluation, in theory, meant a major boost to our export industries.

That has been dissipated, however, because of the Accord Mark Two, which has maintained real wages by the sleight of hand of swapping a two per cent discounting at the next wage case with a boost to superannuation which on the Government's own admission will add 2.5 per cent to labour costs.

So for exporters - and vitally, farmers, the gains of devaluation will be lost because of increased production costs.

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That's one side of the cost picture for farmers.

The other side is interest rates.

Make no mistake about it, the level of interest rates today is a direct result of Government policy.

That's why we have the highest real interest fates in our history.

To stop money flowing out of the country, and to maintain the value, of the dollar, the Government has had to keep interest rates high.

In normal times, the rural sector might have been able to bear both these burdens - just.

These are not normal times, however.

One of the worst droughts in our history broke only two years ago.

The farm sector, stretched to its limits from that drought, emerged to find its world markets under unprecedented threat from a combination of factors.

You will all have heard about the sugar industry - although it might seem a long way from here.

You might not know that world wheat' prices are at a seven-year low, with no prospect of an early recovery forecast - and you know how important wheat is to this State and this port.

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In dairy, rice, beef, citrus, dried vine fruit - almost throughout the rural sector - the outlook is bleak.

Shrinking markets and rising costs are taking a heavy toll, and there is little relief in sight for even the most efficient producer.

I must emphasis that we are not looking at the end of the rural sector as a major force for national prosperity, or anything like it. .

Our rural producers retain the underlying strength and competitiveness that has made them such a strong factor in our economy for so long, and will keep on doing so.

What they are.facing now, however, is an unprecedented combination of cost and market pressures.

The situation is so serious that it only needs a small push to begin a rockslide - a small one at first, perhaps, but one with the potential to grow very quickly and very dangerously.

The danger is this.

Many rural producers are already heavily extended with . debt.

In recent weeks, there has been growing speculation that in the case of some producers, at least, those they owe the money to - mostly banks - are considering the option of foreclosure.

It is not clear how many farmers are affected - but I have been speaking to many who fear they are in danger, and I cannot overemphasise how strongly they feel about this.

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For many, the difference between success and failure in the coming months may well be the equity they hold in their properties.

This is where the tax package poses the greatest danger.

There are two elements in particular which pose a threat: the new capital gains tax and the limit on deductibility of farm losses from off-farm income.

The capital gains tax has been presented as a mild one.

It is a lot better than originally proposed, but that is not saying much.

Its impact will mount - and it yill, it must have an effect on land prices. ' . . „

Already, there are reports of high sales resistance in rural property markets - that is likely to stiffen.

At the same time, investment will start to flow out of the rural sector because of the limit on the amount that can be deducted from off-farm incomes as a result of farm losses.

There are estimates that investment of over $1 billion could be affected.

This measure does not just apply to "Pitt Street Farmers", however.

There are about 41,000 farmers who depend on off-farm income to keep their properties viable. ~

And young people - the people we need coming onto the land - very often depend on good outside jobs to get themselves established in farming.

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The combined impact of this part of the tax package will be again to depress land values.

The combined effect of all these pressures is something I fear very much. ,

The Government's tax package could be enough to tip a few producers over the edge.

Once that happens, there is a real danger of triggering not just a rockslide, but an avalanche.

It must be faced. '

I am using this forum to issue this warning because Newcastle, as the service centre and outlet for some of Australia's most important rural industries, has a vital stake in the future of the rural sector.

So do all Australians, because their prosperity depends very much on the security of the rural sector, which provides about 40 per cent of our exports.

Firm, strong and fast action is.needed.

The first step is a moratorium on the new capital gains tax and the limit on deductibility of farm losses.

The second is concrete assurances - .and concrete backing - to farmers now on the edge of the slope to foreclosure.

The third is strong, decisive and concrete commitment to reducing real wages, Government spending and with them, interest rates and other costs to exporters.

We have been living above our means and we have to stop.

The future of the nation demands nothing less.