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Supplementary Papers

The way to rebuild and reward Australia

Supplementary Papers

The Liberal and National Parties' plan to rebuild and reward Australia

21 November 1991

TABLE OF CONTENTS

1. EMPLOYMENT SCENARIOS TO THE YEAR 2000 A Report Prepared for the Liberal Party of Australia by ACCESS Economics

2. SUPERANNUATION EXECUTIVE SUMMARY 2.1 Overview and Background 2.2 Labor's Track Record 2.3 The Coalition's Goals 2.4 Our Policies

2.4.1 Tax Treatment of Contributions 2.4.2 A Cap on the Rebate 2.4.3 Abolition of Taxes on Final Benefits and the Problem of Transitional Arrangements 2.4.4 A 25 Per Cent Tax Rate on Fund Income

2.4.5 Rollover Relief 2.4.6 Freedom of Choice and Transitional Arrangements 2.4.7 Retirement Savings Accounts & Savings Options 2.4.8 Ceiling On Lump Sum Payouts 2.4.9 A More Generous Approach to Annuities

2.4.10 Abolition of Reasonable Benefit Limits Regime 2.4.11 A Commitment to Full Vesting and Preservation 2.4.12 An Emphasis on Safety and Security of Savings 2.4.13 Measures to Benefit Younger Australians

2.4.14 Access to Superannuation Funds By First Home Buyers 2.4.15 An Additional Tax On Unfunded Benefits 2.4.16 Transitional Arrangements 2.4.17 Aggregate Cost to Revenue

3. HEALTH EXECUTIVE SUMMARY 3.1 The Need for Reform of Medicare 3.2 The Roles of Individuals and Families 3.3 Roles of Federal, State and Local Government 3.4 Role of the Private Sector 3.5 Objectives for First Term of Office 3.6 Specific Policy Measures Affecting

Individuals and Families 3.6.1 Universal Coverage 3.6.2 Pensioners and Welfare Beneficiaries 3.6.3 War Veterans

Table of Contents i

3.6.4

Strengthening the Role of Private Health Insurance 3.6.5 Financial Incentives For Private Insurance 3.6.6 Surcharge on Higher Income Earners Without Private Insurance 3.6.7 Expansion of Private Insurance Options 3.6.8 Community Rating 3.6.9 Improving the System of Reinsurance 3.6.10 Abolition of Medical Insurance Monopoly

and Provision of "Gap" Insurance 3.6.11 Retail Pharmacies as Medicare Agents 3.6.12 Bulk Billing 3.6.13 Rebate Levels 3.6.14 Extension of Pharmaceutical Benefits

Concession Card to Retirees 3.6.15 Medicare Levy 3.7 Specific Measures Affecting Health Care Delivery 3.7.1 Reform of the Public Hospital, System

3.7.2 Control of Doctor Numbers 3.7.3 Supply of Pharmaceuticals 3.8 Public Hospital Measures 3.8.1 Public. Health

3.8.2 Women's Health 3.8.3 Aboriginal Health 3.8.4 Mental Health 3.8.5 Medical Research 3.8.6 Increase in Tobacco Excise 3.9 The Future of Health Care

4. WORLD CLASS SCHOOLS, UNIVERSITIES AND TRAINING EXECUTIVE SUMMARY 4.1 World Class Schools 4.1.1 A Strategy for Excellence

4.1.2 Labor's Failure 4.1.3 National Standards Program 4.1.4 Recognition of the Need for Monitoring 4.1.5 Structural Issues 4.1.6 Quality of Teaching 4.1.7 Curriculum 4.1.8 Educational Opportunity 4.1.9 Parent Choice 4.1.10 Non-Government Schools 4.1.11 The Parent-School Partnership 4.1.12 Educational Opportunity and Access 4.1.13 National Consultation 4.1.14 Schooling and Training 4.2 Training of International Standard

4.2.1 International . Comparison 4.2.2 The Need for Change

ii Table of Contents

4.2.3 Objectives

4.2.4 Labor's Failure 4.2.5 Incentives 4.2.6 Standards 4.2.7 Languages Other Than English 4.2.8 Who Will Provide Training? 4.2.9 Industry 4.2.10 TAFE 4.2.11 Schools 4.2.12 Private Providers 4.2.13 Adult Education and Community Agencies 4.2.14 Group Training Schemes 4.2.15 Skillshare 4.2.16 Career Education 4.2.17 Teachers 4.2.18 Credit Transfer 4.2.19 Competency Based Training 4.2.20 Unemployment and Training 4.2.21 Participation by the Disadvantaged 4.2.22 Financial Responsibility 4.2.23 Student Financial Assistance 4.2.24 Assessment 4.3 International Standard Higher Education

4.3.1 The Loss of Autonomy 4.3.2 The Current System 4.3.3 Restoring University Autonomy 4.3.4 Strengthening Research 4.3.5 Exports of Education Services

5. OPERATIONOF THE GST: TECHNICAL MANUAL 5.1 What is GST? 5.2 An Outline of How GST Works 5.3 GST and Business

5.3.1 Defining Taxable Activities 5.3.2 Requirement to Register 5.3.3 Filing Returns

5.3.4 Calculation of GST Payable 5.3.5 When is GST Payable 5.3.6 Invoicing for GST 5.3.7 Private and Business. Use

5.3.8 GST and Fringe Benefits 5.3.9 Income Tax Deductibility and GST 5.3.10 Time of Supply on Assessing GST Liability 5.3.11 Transition and Implementation Details 5.4 Tax Exempt, Zero-Rated and Other Supplies

5.4.1 Health 5.4.2 Education 5.4.3 Public Sector

Table of Contents 111

5.4.4

Local Government

5.4.5 Real Estate 5.4.6 Financial Services 5.4.7 Insurance 5.4.8 Second-Hand Goods 5.4.9 Sales of Donated Second-Hand Goods 5.4.10 Sale of a Going Concern 5.4.11 Exported Goods 5.4.12 Goods Not in Australia at the Time of Supply 5.4.13 Certain Exported Services 5.4.14 Charities and Religious Institutions 5.4.15 Non-profit Organisations -

5.4.16 Tourism 5.4.17 Gambling and Lotteries 5.4.18 Fine Metal

6. HOW LARGE IS THE BLACK ECONOMY? 6.1 Introduction 6.2 Definition of Black Economy 6.3 Measuring The Immeasurable

6.3.1 Survey Method 6.3.2 Macro-economic Approach 6.3.3 Multiple Indicators Approach' 6.4 International Experience 6.5 Australia: Evaluation of the Size of The Black Economy 6.6 Coalition's Figuring 6.7 Conclusion

7. WHY PAYROLL TAX SHOULD BE ABOLISHED 7.1 Introduction 7.2 The Incidence of Payroll Taxes 7.3 The Defects of Australian Payroll Taxes 7.4 Benefits from The Abolition of Payroll Tax 7.5 Abolition of Payroll Tax 7.6 Senior ALP Figures on Payroll Tax 7.7 Australian Democrats on Payroll Tax 7.8 ALP Payroll Tax Policy 1977 7.9 Labor Premiers and Senior Colleagues on Payroll Tax

8. WHY PETROLEUM EXCISE SHOULD BE ABOLISHED 8.1 Introduction 8.2 Price Impact 8.3 Why Reduce Tax on Petrol? 8.4 The Environment 8.5 National Road Funding Policy 8.6 Conclusion

iv Table of Contents

9. A CASE FOR A GOODS AND SERVICES TAX:

BY RJL HAWKE & PJ HEATING 9.1 Hawke on Tax Reform 9.2 Keating on Tax Reform

Table of Contents V

SUPPLEMENTARY PAPER NO 1

EMPLOYMENT SCENARIOS TO THE YEAR 2000

A REPORT PREPARED FOR THE LIBERAL PARTY OF AUSTRALIA

by

ACCESS ECONOMICS

5 November 1991

Supplementary Paper No 1 1

Following is

a report summarising three projection scenarios prepared by Access Economics which seek to define the broad direction and magnitude of the policy change required to achieve more employment, stabilise foreign debt and achieve rising living standards.

This report is an attempt to provide a framework for the debate about medium term solutions to Australia's economic problems. It highlights the clear advantages that lie in the Liberal/National reform agenda. Its analysis does not, however, portray the detailed outcomes which would be achieved by the implementation of our policies.

The labelling of the scenarios in this paper differs slightly from those used in Chapter 19 as shown below.

Chapter 19 Supplementary Paper No. 1

Base Case Scenario A

Low Road Scenario B

High Road Scenario C

2 Supplementary Paper No 1

1.

INTRODUCTION

With the unemployment rate at 10.2% in September 1991, most commentators now expect it to peak at 10.5-11.0% in the first half of 1992, before entering into a gradual decline. The economic debate is increasingly focussing on how best to manage the economy to maximise

the speed and size of unemployment reductions during the recovery phase, while limiting the extent of the inevitable rebound in inflation and the current account deficit from the low levels that will be experienced during 1991.

A short-term perspective on the unemployment problem produces a simple solution: a massive expansion in fiscal and monetary policy could be used to reduce unemployment perhaps to around 8% by end-1993. However, a reduction in unemployment so achieved may not be maintained, let alone bolstered, in future years. Further, both

inflation and the current account deficit would rise sharply by 1993.

In this paper we take a long-term perspective by considering how the long-term economic outlook is likely to vary under a range of policy approaches. Specifically, we apply three different sets of policy

assumptions to the Access Economics Murphy (AEM) model of Australia' to generate three alternative employment scenarios to the year 2000. Our object is to compare the results of the three scenarios to

quantify the influence of key factors for the long-term outlook for the unemployment rate, living standards and the current account deficit.

The AEM model is suitable for this exercise because it was developed with an emphasis on both long-term and short-term properties. It also has the advantages that it is widely accepted, being used at 31

institutions around Australia 2 , and fully documented so the basis for its results can be publicly examined.

The three scenarios differ in the assumptions adopted for labour efficiency growth, wage determination and fiscal policy. Scenario A is obtained as an updated and extended version of the most recent quarterly five-year-ahead baseline forecast from the AEM Model, modified to enforce maintenance of employee real wages. It shows the unemployment rate falling slowing at first and then levelling off above 8.5%, living standards improving very slowly by historical standards, and foreign debt not stabilising relative to GDP. Scenario B is the central scenario and implies a significant fall in employee real wages. This gives a better outcome for unemployment, living standards and foreign debt than Scenario A. However, unemployment falls very slowly and is still over 7% by the year 2000, the rate of improvement of living standards is still low by historical standards, and foreign debt still does not stabilise relative to GDP. Scenario C investigates how the disappointing outcomes for unemployment, living standards and employee real wages may be affected by further microeconomic reform, and whether foreign debt would be stabilised with a tighter fiscal policy.

The assumptions for the three scenarios are set out in section 2, and the scenarios outcomes are described in section 3.

Supplementary Paper No 1 3

2. SCENARIO ASSUMPTIONS

2.1 Scenario A

In Scenario A employee real wages are maintained at their level for 1990-91, compared with Scenario B where there is a fall of 1.8% from 1990-91 to 1999-00 which is explained below. In other respects the assumptions are identical to Scenario B. Those Scenario •B assumptions are now discussed in detail.

2.2 Scenario B

The last circulated AEM model forecast extended to 1995-96 and was released on 21 August 1991. To construct Scenario B, the forecast horizon has been extended to 1999-00 and the assumptions updated to reflect information available to 23 October. This extension and updating process has had only a marginal effect on the forecast to

1995-96, but has provided for the first time a scenario for 1996-97 through to 1999-00. We choose to describe the results as a scenario rather than a forecast because a very wide margin of uncertainty surrounds the results for such a long time horizon. This unavoidable uncertainty emanates from assumptions in areas such as government policy and the international environment. Some of these uncertainties are quantified by way of Scenarios A and C. Indeed, the major value of long-term scenarios is in drawing policy

conclusions from the sensitivities of the economic outlook to alternative policy approaches, rather than in providing a forecast for the distant future which admittedly has the status of a central forecast but is surrounded by a very wide margin of uncertainty.

A brief account of the assumptions for Scenario B is given here. A more detailed account (but relating to the AEM model forecast of 7 June) can be found in Murphy (1991b).

International Environment

The world economy is experiencing a mild slowdown but a return to trend growth rates is assumed by end-1992. This is forecast to be accompanied by an increase in US short-term interest rates from their

current low level to the level of US long-term interest rates, which is assumed not to change. Consistent with recent forecasts by world organisations, average inflation for Australia's trading partners is forecast at 3.8% p.a. from 1992.

The forecast for Australia's terms-of-trade is shown in Chart 1 and is mainly driven by the underlying assumption for world commodity prices. The terms-of-trade fell 5% for 1990-91 and a further fall of around 4% is expected for 1991-92. Some pick-up is forecast as the world economy recovers: the terms-of-trade rises 1.9% across 1992-93. Then, the terms-of-trade might slowly decline (in keeping with long-term trends) : a decline of 4% is forecast for the eight years to

1999-00.

Fiscal Policy

For 1991-92, fiscal settings are in line with Commonwealth and State Government Budgets. Thereafter, neutral assumptions are adopted in most cases: the growth rate for real public final demand is set to

4 Supplementary Paper No 1

CHART 4

REAL WAGES (1990-91 = 100)

INDEX

110

SCENARIO B

105—.

FISCAL YEAR

EMPLOYEES ` EMPLOYERS

6 Supplementary Paper No 1

the long run equilibrium growth for real GDP; average tax rates are

unchanged; and rates of government benefits increase in line with after-tax average weekly earnings. There are two exceptions to the neutrality assumption. First, the planned tariff cuts announced in the Industry Statement are taken into account. Second, there is a

moderate increase in the average rate of Net PAYE tax (which could, for example, be achieved by fiscal drag) to facilitate restoration of fiscal balance.

Under these assumptions, the Net Public Sector Borrowing Requirement (Net PSBR) falls from around 4% of GDP in 1991-92 to 2.6% of GDP in 1993-94 as a cyclical upturn improves the government budget. However, fiscal balance, defined as a stable or falling public debt to GDP ratio, requires a Net PSBR of 2% of GDP or less. This is not achieved until 1996-97, as the economy improves only very slowly after 1993-94.

The effects of a tighter fiscal policy are considered as part of Scenario C.

Monetary Policy

Monetary growth of 7.4% p.a. is assumed beyond 1992 which is associated with an average inflation rate over the nine years of the scenario of 4.7% p.a. For the short-term, the 90-day bill rate is assumed to trough at 8.4% p.a., just below its current level. The inadvisability of the more recent easings in monetary policy given the assumptions for wages and fiscal policy is indicated by the

forecast. Domestic demand grows at an unsustainable rate during 1992-93 resulting in sharp increases in inflation and the current account deficit. With monetary growth only accommodating inflation of 4.7% p.a., the bill rate rises steadily to a peak of 11.7% p.a. at end-1994. Thereafter it declines with inflation to 8.5% p.a. by the end of the decade.

Population, the Labour Force and Productivity

Table 1 provides a decomposition of the sources of economic growth for the three scenarios compared with historical outcomes. (A decomposition of the same type can be found in Tables 4.1 and 4.3 of DEET (1991)). This decomposition provides one kind of summary picture of the scenario outcomes from the AEM model: it does not show actual scenario assumptions fed into the AEM model, which are explained in the discussions of Table 1. In this section we discuss Scenario B outcomes for rows A, D and F. The remaining outcomes shown in Table 1 are discussed in other sections.

Row F shows that population growth averages 1.31% p.a. for the eight years to 1999-00, hereafter referred to as the scenario time frame. This is calculated from year-by-year population projections produced by the new Demographic Module of the AEM model. The Demographic Module is able to replicate the ABS population projections published in Projections of the Populations of Australia, States and Territories, 1989 to 2031 (ABS Cat. No 3222.0) when similar assumptions are made. For this exercise, the assumptions underlying the ABS series A projection have been used as the starting point. The series A projection uses June 1989 for the base population, and assumes net migration of 125 thousand p.a.

Supplementary Paper No 1 7

TABLE 1

DECOMPOSITION OF ECONOMIC GROWTH (average annual per cent growth)

1975-76 1983-84. 1991-92

to 1983-84 to 1991-92 to 1999-00

A B C

A. Productivity Effect (a) 1.76 0.70 0.43 0.40 0.80

B. Unemployment Effect -0.63 -0.12.. 0.25 0.45 0.72

C. Participation Rate Effect -0.33 0.51 0.24 0.38 0.57

D. Dependency Effect (b) 0.53 0.41 0.19 0.19 0.19

E. Total Per Capita GDP (E ='A+B+C +D) 1.33 1.50 1.11 1.42 2.28

F. Population - Net Migration 0.51 0.73 0.65 0.65 0.65

- Natural Increase 0.79 0.77 0.66 0.66 0.66

- Total 1.30 1.50 1.31 1.31 1.31

G. GDP (G = E+F) 2.65 3.03 2.43 2.75 3.61

Notes:

(a) real GDP per employed person; average annual per cent growth.

(b) proportion of the population aged 15 years and over; average annual per cent growth.

8 Supplementary Paper No 1

and slowly declining fertility and mortality rates. We have updated

the base population to June 1990, and revised down the net migration assumption to account for recently announced changes to the migration program. This gives net migration of 106 thousand for 1991-92, 108 thousand for 1992-93 and 120 thousand p.a. thereafter. As a result, net migration contributes less to total population growth than in the eight years to 1991-92 but more than in the previous eight year period (1975-76 to 1983-84).

The dependency effect shown in row D is also obtained from the Demographic Module projection. It is calculated as the average growth rate in the proportion of the population aged 15 years and

over. A positive dependency effect implies that the working age population is increasing more rapidly than the total population. Row D shows that the dependency effect was strongly positive for 1975-76 to 1991-92. This reflects the large step down in the birth rate in the first half of the 1970s, which cut the growth rate of the population aged under 15 years while having no immediate effect on the working age population. However, in the 1990s increments to the working age population will come from low birth rate cohorts. The dependency effect weakens from 0.41% p.a. over the eight years to

1991-92 to 0.19% p.a. for the scenario time frame.

Row A shows average growth in labour productivity, measured as GDP per employed person. It shows a dramatic decline from 1.76% p.a. for 1975-76 to 1983-84 to only 0.70% p.a. for 1983-84 to 1991-92. Scenario B shows a further small decline to 0.40% p.a. for the 1990s

which is similar to the 0.5% p.a. assumed in the DEET (1991) "pessimistic" productivity growth scenario. The AEM model result for productivity growth in the 1990s can be understood by referring to its business sector production function in which business fixed

capital and business sector labour are combined to produce business

sector value added. 3 Growth in labour productivity is broadly determined by three factors:

The stage of the economic cycle. Productivity fluctuates pro-cyclically as the business sector produces above or below the level indicated by its use of inputs depending on the stage of the economic cycle. Pro-cyclical fluctuations in labour productivity are clearly evident in Chart 2. However, these

short-term fluctuations have relatively little effect on the long-term trends reported in Table 1.

The trend rate of increase in labour efficiency. This is estimated using quarterly data extending from the March Quarter of 1976 to the June Quarter of 1991. Of course, microeconomic reform on a sufficient scale would be likely to yield an improvement in the rate of increase in labour efficiency. The effects of such a development are considered as part of Scenario C.

The rate of growth of the capital-labour ratio. Growth in the capital-labour ratio boosts growth in the output-labour ratio i.e. labour productivity. Chart 2 compares labour productivity with the capital-labour ratio. It shows that the weakening in labour productivity growth for the 1990s is associated with a marked turnaround in the capital-labour ratio from strong growth

Supplementary Paper No 1 9

over the second half of the 1980s to a significant decline in

the first half of the 1990s.

The forecast downturn in the capital-labour ratio is due to weak growth in the capital stock: see Table 2 and Chart 3. Row B of Table 2 shows the capital stock is expected to increase by an average of only 1.25% p.a. for the scenario time frame following outcomes of 3.58% p.a. and 4.14% p.a. for the eight years ending 1983-84 and 1991-92 respectively. This is despite the fact that a reasonable recovery is forecast in investment expressed as a share of GDP from the likely 1991-92 level of 9.4%, to average 10.4% for the scenario time frame compared with 10.0% for the eight years ending 1983-84 and 11.4% for the eight years ending 1991-92 (see row A of Table 2 and Chart 3). Notice that capital stock growth for the scenario time frame is much weaker than for the eight years ending 1983-84 even though investment expressed as a percentage of GDP is slightly higher. The explanation is that the high average level of investment

in the eight years ending 1991-92 produced a large increase in the capital-output ratio so that depreciation of capital now accounts for a larger share of GDP. Thus while gross investment for the scenario time frame appears reasonable by historical standards, net investment

(which netts off depreciation) is weak. The weak outlook for net investment implies weak growth in the capital stock which in turn explains the, weakness in labour productivity growth.

TABLE 2

INVESTMENT AND CAPITAL

1975-76 1983-84 1991-92

to 1983-84 to 1991-92 to 1999-00

A B C

(average annual per cent of GDP)

A. Private Business Fixed Investment 9.97 11.41 10.34 10.36 10.76

(average annual per cent growth)

B. Private Business Fixed Capital Stock 3.58 4.14 1.13 1.25 1.87

Wages

Wages are determined in line with the AEM model wage equation adjusted to end-1992 to replicate likely wage outcomes under Accord Mark VII. The equation captures the average historical response of wages growth to both price inflation and the level and direction of movement of the unemployment rate.

On a year-on-year basis, average wages (defined as average weekly earnings on a National Accounts basis) are forecast to increase by 3.4% in 1991-92. This is close to market expectations but below both

the Budget Paper No.1 forecast (4.5%) and the Accord Mark VII target (5.00). Chart 4 shows that this implies a slight increase in employee real wages (defined as average wages divided by the CPI) but a further large increase in employer real wages (defined as average wages divided by the GDP price deflator). Indeed, Chart 4 shows that by 1992-93 employer real wages are likely to have increased by 7.3%

from the 1988-89 lowpoint; not much less than the increase of 8.3%

10 Supplementary Paper No 1

which occurred from 1979-80 to 1982-83

. and which was widely regarded

as the.major factor in the 1982-83 recession.

Real wages have received relatively little attention in the media in recent times, probably because most emphasis is placed on employee real wages and these are likely to increase by only around 1.1% over

the same time frame in which employer real wages are expected to rise by around 7.3%. However, it is employer real wages that are relevant. for employment decisions. By definition,, the. upward movement in employer real wages relative to.employee real wages must reflect a

fall in the GDP price deflator relative to the CPI. This has been partly due to the fall in the terms-of-trade discussed earlier (see Chart 1)

This increase in employer real wages underwrites much..of the .recent increase in unemployment, even though the recession mainly originated from high interest rates and dislocation of the financial system. It implies that economic recovery is likely to be slow and limited unless.there is a major change in the labour cost outlook. This point is developed in Scenarios A and C.

Turning to the long-term wages outlook, Scenario B shows a fall in employee real wages of 1.8% from 1990-91 to 1999-00 and an increase in employer real wages of 1.8% over the same period (see Chart 4) . The effects of . alternatively assuming maintenance of employee real wages is explored in Scenario A.

2.3 Scenario C

Scenario C adopts the same assumptions as Scenario B with the following variations.

1. Labour efficiency - the second source of variation in labour productivity identified above — is assumed to increase by an additional 0.8% p.a. extending from the beginning of 1993-94 to the end of the, scenario time frame. Broadly, this equates with the .phased full implementation of the microeconomic reforms set out in Appendix A of Industry Commission (1990) Annual Report

for 1989-90. However, it is not entirely appropriate to interpret Scenario C as simulating the IC reforms.

The implementation of some of the Industry Commission (IC) reforms has already been announced and is therefore already included. in Scenarios A and B. In particular, as already noted, Scenarios A and B allow for the phased reductions in tariffs announced in the Industry Statement. The IC notes that:

"progress has been patchy, however, with areas such as tariffs, ports, rail and energy receiving most attention". The IC estimates that the largest efficiency' gains come from competitive reforms of Government Business Enterprises (GBEs) whereas "to date, reforms to GBEs have tended to concentrate on administrative reforms ... rather than on competitive reforms" although some competitive reforms to GBEs have been announced since the` IC Annual Report. A scoresheet would show that significant. microeconomic reforms have been implemented but that the majority of the efficiency gains identified by the IC are still to be .adopted. Therefore the majority of the efficiency gain assumed in Scenario C could be obtained by implementing

Supplementary. Paper No 1 11

those unadopted IC proposals.

The remainder of the assumed

efficiency gain could be obtained by microeconomic reform in areas not considered by the IC. These areas include reforming aspects of the labour relations system which contribute to inefficient work practices in the private sector, and further reform of the tax system.

The assumed steady increase in aggregate labour efficiency is not a perfect method of simulating the phased implementation of the unadopted IC proposals. However, there are two reasons for believing that it should provide a broad indication of the

likely effects. First, although part of efficiency gain from the IC proposals is due to improved capital efficiency or lower tariffs, the majority is in fact due to improved labour efficiency. Second, when the assumed increase in labour efficiency is simulated using the AEM model,, the long run effects on the major macroeconomic aggregates such as GDP,

consumption and investment, are similar to the effects obtained by the IC when it simulated the detail of its proposals using the ORANI model. One advantage of using the AEM model is that

it simulates the economy's transition path in addition to the long run effects.

The assumed increase in underlying labour efficiency steadily flows through into measured labour productivity. Notice from row A of Table 1 that the average growth rate for labour productivity for the scenario time frame rises from 0.40% p.a. under Scenario B to 0.80% p.a. under Scenario C. This higher growth in labour productivity is also reflected in Chart 5. By

1999-00 labour productivity is 3.2% above the Scenario B level.

2. A cut-back in government consumption expenditure relative to Scenario B is implemented through 1993-94 and 1 .994-95. This leaves government consumption expenditure in 1995-96 at its 1992-93 level, compared with an increase of 6.6% over the same period in Scenario B. As discussed in more detail in section 3.2, the saving to the budget from this expenditure cut is passed on partly as reduction in government borrowing, and partly as an income tax cut.

3. SCENARIO OUTCOMES

Detailed tables of results for Scenarios A, B and C are attached as Tables A.1-A.6. Here we focus on the broad results and refer mainly to Tables 1-3 of the main text and Charts 5 to 10. We begin by describing the outcome for the central scenario - Scenario B - in some detail. We then discuss how that outcome is affected by different assumptions for labour efficiency growth, fiscal policy and wages, by comparing the Scenario B outcome with the outcomes for Scenarios C and A.

3.1 Scenario B

With respect to the short-term, GDP may have bottomed in the June Qtr 1991 and is forecast to increase by 2.8% during 1991-92 giving a year-on-year increase of 1.4%. The growth through 1991-92.originates from increases in household spending and public spending:. This slow

12 Supplementary Paper No 1

economic recovery is consistent

with a peak in the unemployment rate

of 10.6% in the first half of, 1992.

For the remainder of the scenario time frame, row G of Table 1 shows that real GDP may increase at an average of 2.75% p.a. This outcome is decomposed in terms of labour force developments in Table 1 and in terms of the expenditure components of GDP in Table 2. We now consider those two tables in turn.

In section 2.1 we explained that. Scenario B shows contributions to average GDP growth of 1.31% p.a. from population growth, 0.19% p.a. from the dependency effect, and 0.40% from the productivity effect, a total of 1.90% p.a. This represents the rate of growth of the working age population adjusted for productivity growth. Row C of Table 1 shows that a rising labour force participation rate adds a further 0.38% p.a. (compared with 0.51% p.a. for the eight years ending 1991-92) so that the labour force, adjusted for productivity growth, increases by an average of (1.90+0.38 =) 2.28% p.a. Still faster GDP growth requires that employment grows more rapidly than the labour force i.e. that the unemployment rate falls. In Scenario B this unemployment effect contributes an additional 0.45% p.a. giving the outcome for average growth in GDP of (2.28+0.45=) 2.75% p.a.

Underlying the participation rate effect is a rise in the participation rate from a low-point of 63.0% in 1992-93 to 65.2% in 1.999-00. This increase derives from a continuing upward trend in the female labour force participation rate. By comparison, DEET (1991) projections for the labour force, participation rate in the year 2001

are 63.8% ("Central Scenario") and 65.6% ("High Participation Scenario"). The DEET "Central Scenario" gives a lower participation rate because it assumes that participation rates for older males continue to decline in line with recent trends. The "High

Participation Rate" scenario assumes participation rates for older males stabilise because: "it has been argued recently that the ageing of the population and budgetary constraints will lead to pressure to

slow or even reverse that trend (towards increasing early retirement)."

Underlying the unemployment effect is a fall in the unemployment rate from 10.3% in 1991-92 to 7.1% in 1999-00 (see Chart 8) . While this is a large fall, it is achieved very slowly: the unemployment rate is 9.1% in 1993-94 and 8.3% in 1996-97.

The interpretation of this time path for the unemployment rate will become clearer from a comparison of the results of Scenarios A, B and C. Broadly, the natural process of recovery from recession, is only likely to reduce the unemployment rate to around 9.1% by 1993-94. This outcome is due to the effect on labour demand of higher labour costs. These' higher labour costs originate from the expected

increase of 7.3% in employer real wages from 1988-89 to 1992-93 discussed earlier. Further falls in the unemployment rate will depend on substantial reductions being achieved in labour costs, which could occur through higher productivity, lower employee real wages or, fortuitously, a higher terms-of-trade. In Scenario B, after 1992-93, employee real wages fall (see Chart 7),

Supplementary Paper No 1 13

CHART 5.

PRODUCTIVITY (1990-91 = 100 )

110

105

100

95

90

85

80 7

FISCAL YEAR

SCENARIO A — SCENARIO B ---- SCENARIO C

FISCAL YEAR

SCENARIO A SCENARIO B SCENARIO C

14 Supplementary Paper No 1

10

0

CHART 7

EMPLOYEE REAL WAGE

INDEX

105

103

101

99

97

95 76 79 82 85 88 91 94 97 0

FISCAL YEAR

SCENARIO A SCENARIO B ---- SCENARIO C

Supplementary Paper No 1 15

CHART 9

CONSUMPTION PER CAPITA 1984-85 $ SCENARIOS 9.5

- -

7 i......_. i ^........_.i i .......f.. .1.. i_.....i i....._. i. ^ .. _...1i ......1.. i. ._I........._ . i ......._i.. . i. i ........ 1

76 79 82 85 88 9 94 97 0

FISCAL YEAR

SCENARIO A SCENARIO B - SCENARIO C

CHART 10

FOREIGN DEBT

76 79 82 85 88 911 94 97

FISCAL YEAR

SCENARIO A SCENARIO B ----- SCENARIO C

16 Supplementary Paper No 1

TABLE 3

COMPONENTS OF GDP (average annual per cent growth)

1975-76 1983-84 1991-92

to 1983-84 to 1991-92 to 1999-00

A B C

Components of GDP:-A. Private Consumption 2.78 2.88 1.58 1.81 2.47

B. Private Dwelling Investment 0.50 1.71 2.46 3.55 6.58

C. Private Business Fixed Investment 3.70 2.59 3.82 4.43 6.24

D. Public Final Demand 2.20 2.63 2.19 2.27 2.04

E. Gross National Expenditure 2.74 2.67 2.14 2.42 3.14

F. Exports of Goods & Services 3.31 7.99 3.82 4.20 5.46

G. Imports of Goods & Services 3.81 5.81 2.61 2.80 3.45

H. Gross Domestic Product 2.65 3.03 2.43 2.75 3.61

Supplementary Paper No , 1 17

productivity rises (see Chart 5), but the terms-of-trade falls in

line with long-term terms (see Chart 1). The net result is a fall in labour costs sufficient to reduce the unemployment rate to 7.1% by 1999-00.

Turning to the expenditure side of the National Accounts and Table 3, while GDP growth averages 2.75% p.a. for the scenario time frame, some components of expenditure grow significantly faster or slower. The fastest growing component is private business fixed investment which increases by an average of 4.4%p.a. While this may appear high, this growth is from a very low base in 1991-92 and, as explained in section 2.1, the implied average outcome for gross

investment as a share of GDP is not high by historical standards (see Table 2 and Chart 6), and the implied outcome for net investment as a share of GDP is low. Private consumption grows by an average of only 1.8% p.a., not far above average population growth of 1.3% p.a. Thus private consumption per capita increases by an average of only 0.5% p.a., compared with 1.5% p.a. for 1975-76 to 1983-84 and 1.4% p.a.

for 1983-84 to 1991-92 (see Chart 9) . This low growth for private consumption helps bring about average growth of only 2.4% p.a. in Gross National Expenditure, compared with 2.75% p.a. for Gross Domestic Product. Thus net exports contribute an average of (2.75-2.4 =) 0.35% p.a. to growth with exports growth of 4.2% p.a.

exceeding imports growth of 2.8% p.a.

Regarding the current account balance, over the scenario time frame a significant positive contribution from rising net exports underpined by a falling real exchange rate is offset by negative contributions from a falling terms-of-trade and a rising interest burden on a rising foreign debt. This leaves the current account deficit at the end of the decade at 4.5% of GDP. However, in the short-term, the current account deficit is likely to increase and is forecast to peak at over 6% of GDP in 1993-94. This large increase is from the likely

1991-92 outcome of under 4% of GDP and is due to the economic recovery, particularly the forecast pick-up in investment in plant and equipment (see Chart 6), as well as the adverse effect on export and import competing industries of high real labour costs (see the employer real wage on Chart 4). The current account deficit was also around 6% of GDP in 1989-90. While economic activity and investment were higher at that time, both the terms-of-trade and real labour costs were considerably more favourable than is likely to be the case in 1993-94.

Under that path for the current account deficit, the foreign debt to GDP ratio rises from 34.4% at end-June 1991 to 59.1% at end-June 2000 at which point it is still increasing by 0.8 percentage points p.a. (see Chart 10). This raises some doubts about the viability of

Scenario B which are taken up in Scenario C.

3.2 Scenario C

Scenario B has three clearly unattractive features.

1. The rate of fall in the unemployment rate would widely be regarded as unacceptably slow, with unemployment of 9.1% in 1993-94, 8.3% in 1996-97 and 7.1% in 1999-00.

18 Supplementary, Paper No 1

2.

Living standards improve only very slowly with per capita private consumption increasing by an average of only 0.5% p.a. during the scenario time frame.

3. The foreign debt to GDP ratio does not quite stabilise.'

These observations motivated Scenario C, the assumptions for which were set out in section 2.3. From 1993-94, labour efficiency growth was higher due to additional microeconomic reform and government

consumption lower.

Table 1 shows that during the scenario time frame the average growth rate for real GDP is 3.6% p.a. in Scenario C compared with 2.75% p.a. in Scenario B. Part of this •increase is a direct effect from more

rapid growth in labour efficiency: the productivity effect is 0.80% p.a. in Scenario C compared with 0.40% p.a. in Scenario B (see Table 1). This improved path for productivity can also be seen in Chart 5. Faster productivity growth also has indirect effects on GDP growth via its effect on labour costs. In Scenario C, employee real wages fall by only 0.3% from 1990-91 to 1999-00 compared with a fall of 1.8% in Scenario B (see Chart 7). However, with faster productivity growth, this still leaves effective labour costs at the end of Scenario C at well below their Scenario B level raising labour demand. The unemployment rate falls faster (see Chart 8) to be 5.2% at the end of Scenario C compared with 7.1% at the end of Scenario B. An encouraged worker effect raises the participation rate so the participation rate effect shown in row C of Table 1 rises from 0.38% p.a. in Scenario B to 0.57% p.a. in Scenario C.

In summary, the increase of (3.61-2.75=) 0.86 percentage points p.a. in average GDP growth from Scenario B to Scenario C can be decomposed as a productivity effect of 0.40 percentage points p.a., an unemployment effect of 0.27 percentage points p.a., and a labour force participation rate effect of 0.19 percentage points p.a.

On the expenditure side of the National Accounts (see Table 3), the largest change is for private business fixed investment which increases by an average of 6.2% p.a. during the scenario time frame compared with 4.4% p.a. under Scenario B. This additional investment is associated with microeconomic reform, and implies an average level of gross investment as a share of GDP of 10.8%, compared with 10.4% under Scenario B, 10.0% in the eight years to 1983-84 and 11.4% in the eight years to 1991-92 (see Table 2 and Chart 6). Compared with Scenario B, GDP is higher and income tax rates lower and the implied increase in after-tax real income results in private consumption increasing by an average of 2.5%p.a. compared with 1.8%p.a. under Scenario B. A similar comparison can be made for growth in private consumption per capita (see Chart 9).

Scenario C also assumes a cut of 6% in government consumption

relative to Scenario B phased in during 1993-94 and 1994-95. This cut is equivalent to 1.2 percentage points of GDP. It combines with the positive effects on revenue from higher productivity growth to improve the government's budgetary position. This is reflected in a reduction in the Net Public Sector Borrowing Requirement' (Net PSBR), which is 1.0 percentage points of GDP lower in 1994-95 and 1.8

percentage points of GDP lower by the end of the scenario time frame. The snowballing effects of both higher productivity growth and lower

Supplementary Paper No 1 i9

service payments on public debt, are passed on as mounting cuts in

Net PAYE tax rates.

The lower Net PSBR reduces demand for foreign borrowing inducing a lower exchange rate. This improves the current account deficit which now falls to 3.7% of GDP by the end of the decade compared with 4.5% of GDP under Scenario B. This leaves foreign debt at 53.8% of GDP in

1999-00 and declining by 0.8 percentage points p.a., compared with Scenario B where foreign debt was 59.1% of GDP and still increasing by 0.8 percentage points p.a. (see Chart 10).

Returning to the unattractive features of Scenario B listed at the beginning of this section, we can observe the following with respect to Scenario C.

1. The rate of fall in the unemployment rate is now more rapid in the second half of the 1990s, with unemployment of 9.0% in 1993-94, 8.0% in 1996-97 and 5.2% in 1999-00.

2. Living standards now improve at close to the rate of the recent past with per capita private consumption increasing by an average of 1.1% p.a. during the scenario time frame, compared with 0.5% p.a. for Scenario B and 1.5% p.a. for 1975-76 to 1983-

84 and 1.4% p.a. for 1983-84 to 1991-92.

3. The foreign debt to GDP ratio now turns down by the end of the decade.

These observations are reflected in Charts 8, 9 and 10 respectively.

3.3 Scenario A

Scenario B showed a fall in employee real wages of 1.8% from 1990-91 to 1999-00. In Scenario A, the AEM model wage equation is adjusted to instead maintain employee real wages. The precise outcome of the adjustment is a fall of 0.3%, which coincides with the outcome under Scenario C (see Chart 7). Thus Scenario A shows the effects of imposing the Scenario C outcome for employee real wages without the associated package of microeconomic reform and ;cuts in government consumption expenditure.

The decline in unemployment rate seen in Scenario B is arrested in the mid-1990s leaving an unemployment rate of above 8.5% throughout the second half of the 1990s (see Chart 8). Average GDP growth is 2.43% p.a. compared with 2.75% p.a. in Scenario B and Table 1 shows that most of the fall is due to the unemployment effect.

Notice that because of lower GDP growth, real wage maintenance under these assumptions actually lowers living standards. Per capita consumption grows at an average rate of 0.3% p.a. compared with 0.5% p.a. under Scenario B (see Chart 9).

Also, there are assumptions under which real wage maintenance is consistent with strong employment growth. This is illustrated by Scenario C which combines the same outcome of maintaining employee real wages with much more rapid growth in labour efficiency.

20 Supplementary Paper No 1

TABLE A.1 — REAL GDP: PART I

1 (1) (2)

-------------------------------------------------------------------

(3) (4) (5) (6) (7)

Date I NA1 NA2 NA3 NA4 NA5 NA6 NA7

- -

1 1984-851 128279 40194 ------------------------------------------------------------

10415 22919 2576 9018

---I

6171

1 1985-861 132769 42152 10322 24207 2419 9921 6684 I

1 1986-871 133861 43072 9261 25157 2363 9526 6893 I

1 1987-881 139044 44354 10136 28787 2936 7759 6266 I

1 1988-891 144403 44823 12243 33208 3377 7544 6074

1 1989-901 150552 46575 11648 33145 2459 9387 6511 I

( 1990-911 152064 48433 ------------------------------------------------------------

10321 29219 2394 8999 6849 I

-

SCENARIO A,B,C: ------------------------------------------------------------

----i

-----I

1 1991-921 155042 49845 10722 24488 2469 8322 7029 I

1 1992-931 159123 50901 ------------------------------------------------------------

11499 26335 2648 8426 7229 I

-----I

SCENARIO A:

1 1993-941 162959 51995 ------------------------------------------------------------

11533 29818 2655 9354

-----I

7384 I

1 1994-951 165992 53111 11281 30500 2597 9568 7542 I

1 1995-961 167705 54252 11589 30617 2668 9338 7703 I

1 1996-971 168948 55417 12055 30879 2776 9418 7867 I

1 1997-981 170634 56607 12138 31224 2795 9523 8036 I

1 1998-991 172865 57823 12380 31876 2850 9722 8207 I

1 1999-001 175718 59065 13023 33056 2999 10082 ----I

----I

SCENARIO B: ------------------------------------------------------------

------------------------------------------------------------

-

I

1 1993-941 162913 51995 11533 29818 2655 9354

-----I

7384

1 1994-951 165775 53111 11279 30572 2597 9591 7542 I

1995-961 167400 54252 11591 30580 2669 9327 7703 1

1996-971 168930 55417 12276 30847 2827 9408 7867 1,

1 1997-981 171354 56607 12720 31632 2929 9648 8036 1

1 1998-991 174705 57823 13275 32902 3056 10035 8207 I

1 1999-001 178967 59065 ------------------------------------------------------------

14178 34631 3264 10562 8383 I

--- - -1

SCENARIO C: I

-

1 1993-941 163253 50950 ------------------------------------------------------------

12731 31017 2932 9730

----I

7384 I

1 1994-951 166237 50384 13097 32807 3016 10292 7542

1 1995-961 168450 50912 12726 32298 2931 9851 7703 I

1996-971 171343 52116 13709 32567 3157 9933 7907 I

1 1997-981 175457 53348 15027 34189 3461 10428 8140 I

1 1998-991 181077 54611 16213 36589 3734 11160 8380 I

1 1999-001 188488 55904 17851 39729 4111 12117 8628 I

(1) PRIVATE CONSUMPTION $m 1984-85

(2) GENERAL GOV'T CONSUMPTION $m 1984-85

(3) PRIVATE DWELLING INVESTMENT $m 1984-85,

(4) PRIVATE BUS. FIXED INVESTMENT $m 1984-85

(5) REAL ESTATE TRANSFER EXPENSES $m 1984-85

(6) PUBLIC ENTERPRISE FIXED INVESTMENT $m 1984-85

(7) GENERAL GOV'T FIXED INVESTMENT $m 1984-85

Supplementary Paper No 1 21

TABLE A.2 - REAL GDP: PART II

(1) (2)

-------------------------------------------------------------------

(3) (4) (5) (6) (7) I

1 Date I NA8 NA9 NA10 NA11 NAl2 NA13 NA14 I

-----I

1984-851 1118 99

i------------------------------------------------------------

212 221001 34772 -39508 216265 I

1985-861 1864 -563 -1476 228299 36781 -40081 224999 I

1 1986-871 -793 -339 670 229671 40077 -38973 230775 I

1 1987-881 369 -571 2180 241260 43039 -42850 241449 I

1 1988-891 2852 309 5548 260381 43235 -53134 250482 1

1 1989-901 1355 1881 5562 269075 46453 -55801 259727 I

1 1990-911 -1672 732 1316

-

258655 52500 -----------------

-53778 257377 I -----I

SCENARIO i-------------------------------

A,B,C:

- ----

-----1

1991-921 -1069 -274

------------------------------------------------------------

1801 258375 56363 -53826 260912 1

1992-931 741 559

------------------------------------------------------------

2294 269756 56963 -58333 268385 I

-----I

SCENARIO A: I

-----I

1 1993-941 1511 -143

i------------------------------------------------------------

2589 279656 59064 -62219 276501 I

1 1994-951 1103 42 2789 284526 61239 -63792 281973 I

1 1995-961 853 225 2997 287948 64473 -64124 288296 I

1 1996-971 631 339 2930 291261 67601 -64296 294567 I

1 1997-981 559 405 2815 294738 70593 -64536 300795 I

1 19.98-991 648 443 2648 299464 73489 -65042 307911 I

1 1999-001 855 448

------------------------------------------------------------

2480 306110 76074 -66127 316058 I

-----i

SCENARIO B: I

-----I

1 1993-941 1617 -140

------------------------------------------------------------

2573 279702 59107 -62237 276572

1 1994-951 1106 71 2484 284128 61722 -62920 282930 I

1 1995-961 765 272 2623 287182 65410 -62895 289697 I

1 1996-971 668 395 2555 291192 68951 -63216 296927 I

1 1997-981 769 459 2429 296583 72220 -64017 304787 I

1 1998-991 984 493 2248 303730 75362 -65255 313837 I

1 1999-001 1263 504 2097

(------------------------------------------------------------

312915 78307 -67129 324093 I

-----I

SCENARIO C: I

1 1993-941 2533 -96

------------------------------------------------------------

2365 282799 59782 -63322 -----i

279258 1

1 1994-951 1493 144 1875 286888 63128 -63308 286709 I

1 1995-961 829 401 1929 288031 68113 -62498 293646 I

1 1996-971 998 573 1841 294146 73206 -63241 304111 1

1 1997-981 1389 638 1629 303708 77490 -64949 316248 I

1 1998-991 1784 681 1317 315547 81775 -67221 330101 I

1 1999-001 2294 722

-------------------------------------------------------------------

1054 330899 86261 -70621 346539 I

(1) PRIVATE NON-FARM INVENTORY INVESTMENT $m 1984-85

(2) FARM & PUBLIC AUTHORITY INVENTORY INVESTMENT $m 1984-85 (3) STATISTICAL DISCREPANCY $m 1984-85

(4) GROSS NATIONAL EXPENDITURE $m 1984-85

(5) EXPORTS OF GOODS & SERVICES $m 1984-85

(6) — IMPORTS OF GOODS & SERVICES $m 1984-85

(7) GROSS DOMESTIC PRODUCT $m 1984-85

22 Supplementary Paper No 1

TABLE A.3 - WAGES & PRICES; EMPLOYMENT & UNEMPLOYMENT

1 (1) (2)

------------=------------------------------------------------------

(3) (4) (5) (6) (7)

Date I NA16 PGDPT PCPIT WT NTT PARTT URT

1984-851 216230 100.0 ------------------------------------------------------------

137.2 4976 6626 60.89

-----I

8.50

1 1985-861 240595 106.9 148.7 5287 6893 61.73 7.95 I

1 1986-871 265054 114.8 162.6 5655 7036 61.90 8.26

1 1987-881 299363 124.0 174.5 6015 7236 61.99 7.74 I

1988-891 339765 135.6 187.3 6468 7558 62.71 6.67

1989-901 372153 143.3 202.3 6930 7850 63.61 6.19 I

1 1990-911 379147 147.3 ------------------------------------------------------------

213.0 7346 7807 63.67 8.38

SCENARIO A,B,C: ------------------------------------------------------------

-----I

1991-921 389156 149.1 218.6 7597 7707 63.20

-----I

10.29 1

1 1992-931 417110 155.4 ------------------------------------------------------------

227.8 7953 7819 63.04 10.10 I

SCENARIO A: -------------------

-----I

I

1993-941 454927 164.5 241.7 8334 8061 63.33 9.11

1 1994-951 491722 174.4 256.8 8867 8243 63.50 8.71 I

1 1995-961 531479 184.3 272.6 9426 8381 63.59 8.70 I

1 1996-97) 573373 194.6 289.1 9986 8518 63.72 8.75 I

1 1997-981 614473 204.3 304.9 10507 8665 63.89 8.77 I

1 1998-991 656379 213.2 319.2 10980 8832 64.11 . 8.70 I

1 1999-001 701776 222.0 ------------------------------------------------------------

333.0 11445 9024 64.40 8.50 I

SCENARIO B:

-----I

I

1 1993-941 454901 164.5 -----------------------------------------------------------------

241.7 8323 8062 63.33 9.11 I

1 1994-951 492992 174.2 257.0 8806 8263 63.56 8.58 I

1 1995-961 531636 183.5 271.9 9308 8427 63.74 8.41 I

1 1996-971 570819 192.2 286.0 9763 8596 63.97 8.28 I

1 1997-981 609543 200.0 298.8 10156 8791 64.29 8.02 I

1 1998-991 650378 207.2 310.5 10519 9018 64.69 7.61 I

1 1999-001 697188 215.1 ------------------------------------------------------------

322.6 10921 9274 65.17 7.07 I

SCENARIO C:

-----I

1 1993-941 460675 164.9 ------------------------------------------------------------

242.6 8332 8074 63.37

-----I

9.03

1 1994-951 506568 176.7 261.3 8910 8297 63.68 8.37 I

1 1995-961 546440 186.1 276.7 9492 8454 63.83 8.25 I

1 1996-971 587602 193.2 288.4 9899 8650 64.14 7.95 I

1 1997-981 627777 198.5 297.4 10177 8918 64.68 7.27 I

1 1998-991 669425 202.8 304.6 10422 9238 65.36 6.34 I

1 1999-001 720431 207.9 312.7 10749 9601 66.15 5.22 I

(1) NOMINAL GROSS DOMESTIC PRODUCT $m

(2) GROSS DOMESTIC PRODUCT DEFLATOR 1984-8 =100

(3) CONSUMER PRICE INDEX 1980-8 =100

(4) AVERAGE EARNINGS (NAT. AC. BASIS) $ p.q.

(5) EMPLOYMENT pers.'100"0

(6) PARTICIPATION RATE per cent

(7) UNEMPLOYMENT RATE per cent'

Supplementary Paper No 1 23

TABLE A.4 - FINANCIAL MARKETS; PUBLIC SECTOR

(1) (2) (3) (4) (5) (6) (7)

Date I RCST RLT ETWIT EUSAT POL1T PSBRT PUDEBT

-----I

1 1984-851 12.80 13.75 ------------------------------------------------------------

79.20 86.13 22.27 5.008 68.90 I

1 1985-861 16.45 13.50 65.00 66.55 22.57 4.499 79.16 1

1 1986-871 14.80 12.95 56.30 67.72 23.65 3.611 89.82 I

1 1987-881 13.35 12.80 56.60 72.03 24.10 0.110 98.27 I

1 1988-891 13.15 11.95 59.80 79.40 25.32 -1.386 96.52 I

1 1989-901 18.30 13.50 59.40 75.53 23.95 0.416 90.9 1

1 1990-911 15.10 13.40 61.60

---------------------------------------------=--------------

78.90 22.89 1.870 91.5 I

-----I

SCENARIO A,B,C: ------------------------------------------------------------

I

-

1 1991-921 10.50 10.85 59.67 76.86 22.30 3.881

----I

97.1 I

1 1992-931 9.05 10.14 59.48

------------------------------------------------------------

78.42 22.71 3.261' 111.3 I

-----I

SCENARIO A: ------------------------------------------------------------

I

1 1993-941 10.76 10.27 58.32 76.90 22.74 2.660

-----I

124.0

1 1994-951 11.70 10.41 58.20 76.75 22.98 2.753 134.9

1 1995-961 11.76 10.11 55.95 73.77 23.45 2.507 147.7 I

1 1996-971 11.66 9.74 53.78 70.91 23.74 2.366 160.3 I

1 1997-981 11.09 9.33 51.83 68.34 23.97 2.166 173.1 I

1 1998-991 10.14 9.01 50.31 66.33 24.10 1.817 185.3 1

1 1999-001 9.36 8.82 49.27

------------------------------------------------------------

64.97 24.01 1.479 195.9 I

SCENARIO B:

-----I

1 1993-941 10.76 10.27 ------------------------------------------------------------

58.32 76.90 22.75 2.619

-----I

124.0 I

1 1994-951 11.70 10.06 56.35 74.30 22.92 2.494 135.2 I

1 1995-961 11.54 9.69 54.18 71.45 23.26 2.168 146.8 I

1 1996-971 10.96 9.31 52.29 68.95 23.38 1.878 157.5 I

1997-981 10.08 8.99 50.80 66.98 23.32 1.548 167.2 I

1 1998-991 9.08 8.83 49.82 65.69 23.02 1.176 175.3 I

1 1999-001 8.54 8.83 49.27

------------------------------------------------------------

64.97 22.40 0.936 181.4 I

SCENARIO C: ------------------------------------------------------------

-----I

I

-

1 1993-941 11.07 10.27 58.32 76.90 22.69 2.043

----I

124.0

1 1994-951 13.03 9.98 53.61 70.69 22.55 1.504 133.2 I

1 1995-961 12.25 9.31 50.96 67.20 22.51 1.258 140.1 I

1 1996-971 10.90 8.75 48.99 64.60 22.33 0.714 145.9 I

1 1997-981 9.57 8.37 47.70 62.90 21.90 0.051 148.8

1 1998-991 8.08 8.22 47.10 62.11 21.08 -0.527 147.4 I

1 1999-001 7.27 8.34 47.11 62.12 19.81 -0.860 141.8 I

(1) 90-DAY BILL RATE (BEG. OF PERIOD) %p.a.

(2) 10-YEAR BOND RATE (BEG. OF PERIOD) %p.a.

(3) TWI EXCHANGE RATE (BEG. OF PERIOD) May '70=100

(4) US DOLLAR EXCHANGE RATE (BEG. OF PERIOD) USc/$A

(5) RATE OF TAX ON LABOUR INCOME percentage

(6) NET PSBR % of gdp

(7) PUBLIC DEBT (BEG. OF PERIOD) $b

24 Supplementary Paper No 1

TABLE A.5 - BALANCE OF PAYMENTS

1 (1) (2) (3) (4) (5) (6) (7) 1

1 Date I TGSBQ TOT TGSB TRB NIB CURB FODEBT I

1 1984-851 -2.198 99.8 I------------------------------------------------------------

-2.229 0.1010 -3.102 -5.230 - -1 ---29.9

1 1985-861 -1.468 91.3 -3.096 0.3098 -3.231 -6.017 51.2 'I

1 1986-871 0.473 87.5 -1.840 0.4698 -3.296 -4.666 75.0

1 1987-881 0.081 95.0 -0.821 0.5688 -3.537 -3.788 83.0 I

1 1988-891 -3.930 108.2 -2.121 0.6520 -3.929 -5.399 95.9 I

1 1989-901 -3.606 106.7 -2.031 0.6302 -4.591 -5.991 116.0 1 1990-911 -0.494 101.3 -0.203 -------------------------------------------------------------

0.6509 -4.574 -4.126 126.7'1

SCENARIO A,B,C: ---------------------------------------------------=--------

-----I

-----I

1 1991-921 0.974 97.3 0.311 0.6029 -4.834 -3.920 130.3 I

1992-931 -0.507 97.8 -0.809 ------------------------------------------=-----------------

0.6019 -5.188 -5.395 141.9

SCENARIO A: ------------------------------------------------- "-----------

-----1

-

1993-941 -1.141 97.2 -1.446 0.6006 -5.565 -6.410 ----I

165.1 I

1 1994-951 -0.907 95.8 -1.504 0.6005 -5.731 -6.634 195.2`I 1 1995-961 0.119 94.4 -0.961 0.5999 -5.997 -6.358 234.4 I

1996-971 1.121 93.9 -0.243 0.5997 -6.284 -5.927 275.5 I

1 1997-981 2.012 93.7 0.475 0.5995 -6.534 -5.459 317.3 I

1 1998-991 2.742 93.6 1.104 0.5995 -6.737 -5.034 357.8 I

1 1999-001 3.147 93.7

--------------------------------------------------=---------

1.487 0.5995 -6.876 -4.789 396.1 I

-----1

SCENARIO B: -----------------------------------------------------------

I

1 1993-941 -1.132 97.2 -1.453 0.6006 -5.591 -6.444 -----1

165.1 1

1 1994-951 -0.426 95.6 -1.173 0.6006 -5.860 -6.432 198.7 I

1 1995-961 0.866 94.1 -0.402 0.6001 -6.096 -5.898 236.9 I

1 1996-971 1.930 93.6 0.387 0.5997 -6.357 -5.370 274.9 I

1 1997-981 2.690 93.3 1.017 0.5995 -6.585 -4.969

. 311.6 I

1 1998-991 3.220 93.2 1.483 0.5996 -6.755 -4.673 346.3'I

1 1999-001 3.449 93.2 1.698 0.6000 -6.847 -4.549 379':1'I

SCENARIO C:

--

1 1993-941 -1.270 97.0 ------------------------------------------------------

-1.655 0.6009 -5.772 -6.826 ------- --1.

165.1

1 1994-951 -0.065 95.2 -0.984 0.6025 -6.087 -6.468 205.5 1

1 1995-961 1.908 93.4 0.357 0.6036 -6.225 -5.265 245.9'I

1 1996-971 3.274 92.6 1.408 0.6039 -6.465 -4.453 281.5 I

1997-981 3.964 92.2 2.003 0.6043 -6.668 -4.061 312.7'I

1 1998-991 4.408 91.9 2.399 0.6055 -6.780 -3.776 340.2'I

1 1999-001 4.514 91.6 2.453 0.6071 -6.789 -3.730 363:9 I

(1) B.O.P.: BAL. ON GOODS & SERVICES (VOLUME) % of gdp

(2) B.O.P.: TERMS-OF-TRADE 1984-85=100

(3) B.O.P.: BAL. ON GOODS & SERVICES (VALUE) % of gdp

(4) B.O.P.: NET UNREQUITED TRANSFERS % of gdp

(5) B.O.P.: NET INCOME % of gdp

(6) B.O.P.: BAL. ON CURRENT ACCOUNT % of gdp

(7) B.O.P.: FOREIGN DEBT (BEG. OF PERIOD) $b

Supplementary Paper No 1 25

TABLE A.6 — CAPITAL STOCKS

(1)

Date I KF

1984-851 147843 1985-861 153050 198.6-871 159672 1987-881 167052 1988-891 176569 1989-901 187641 1990-911 196726 ---------------

SCENARIO A,B,C:

1991-921 199928 1992-931 198279

SCENARIO A:

1993-941 198466 1994-951 201641 1995-961 205026 1996-971 208128 1997-981 211103 1998-991 214038 1999-001 217207

SCENARIO B:

1993-941 198466 1994-95I 201640 1995-961 205089 1996-971 208150 1997-981 211097 1998-991 214393 1999-001 218419

SCENARIO C:

1993-941 198467 1994-951 202698 1995-961 207969 1996-971 212189 1997-98I 216173 1998-991 221118 1999-001 227588

(2) KR

160168 164239 168074 170656 174082 180710 187051

191409 195927

201140 206182 210744 215474 220542 225502 230540

201140 206182 210741 215474 220792 226397 232407

201140 207536 214085 219961 226716 234686 243675

(1) PRIVATE ENT. STOCK OF BUS. FIXED CAPITAL $m 1984-85

(2) STOCK OF DWELLINGS $m 1984-85

26 Supplementary Paper No 1

0

4. REFERENCES

Department of Employment, Education and Training (1991), "Australia's Workforce in the Year 2001", Australian Government Publishing Service, Canberra.'

Industry Commission (1990), "Annual Report 1989-90", Australian Government Publishing Service, Canberra.

Murphy, C.W. '(1988a), "Rational Expectations in Financial Markets and the Murphy Model", in Burns, M.E. and Murphy, C.W. (eds), Macroeconomic Modelling in Australia, Australian Economic Papers, Supp., 61-88.

Murphy, C.W. (1988b), "An Overview of the Murphy Model", in Burns, M.E. and Murphy, C.W. (eds), Macroeconomic Modelling in Australia, Australian. Economic Papers, Supp., 175-199.

Murphy, C.W. (1989a), "The Budget Strategy & Foreign Debt", Australian Economic Review, 4'89, 32-51.

Murphy, C.W. (1989b), "Model Based Evidence on Australia's External Debt", Office of EPAC Discussion Paper, 89/09, 17pp.

Murphy, C.W. (1990), "Investment in the 1990s", in Model-Based Estimates of Investment in the 1990s, Office of EPAC Background Paper, No. 6, 2.1-2.30.

Murphy, C.W. (1991a), "The Transitional Costs of Reducing Inflation Using Monetary Policy", in Australia's Inflation Problem, Office of EPAC Background Paper, No. 11, 8.1-8.22.

Murphy, C.W. (1991b), "The Macroeconomic Outlook", Australian Economic Review, 2'91, 3-12.

Stemp, P.J. and Murphy, C.W. (1991c), "Monetary Policy in Australia: the Conflict Between Short-term and Medium-term Objectives", Australian Economic Review, 2'91.

Supplementary Paper No 1 27

1,

, The AEM model is a further development of the Murphy model which was re-named with the move of its developer from the Australian National University to Access Economics. It is a quarterly macroeconometric model of Australia designed for forecasting and

policy analysis, and is the result of a decade of research at the Treasury, the Office of EPAC and the Australian National University (ANU). An earlier version of the model was described in two articles appearing in Australian Economic Papers (Murphy,

1988a, 1988b), model-based forecasts and policy analysis have appeared in the Australian Economic Review (Murphy, 1989a, 1991b, 1991c), and the model has been regularly used in consultancies for the Office of EPAC (Murphy, 1989b, 1990, 1991a).

2. The AEM model is available in a user-friendly form for use on personal computers, and is used by most economic departments and agencies in Canberra, by some of Australia's leading financial institutions, a number of business organisations, and in teaching and research at ten universities. The model is used to produce a

fresh five-year-ahead Baseline Forecast for the Australian economy following the release of each quarterly National Accounts. This forecast is sent to subscribers on diskette accompanied by a written report. The software can then be used to generate forecasts and alternative scenarios based on the user's own assumptions. The software is available from Access Economics (40 Brisbane Ave BARTON ACT 2600).

3. The business sector production function is more complicated than this because imports and exports are actually separately identified as inputs and outputs. The model also includes separate "production functions" for the general government and dwelling sectors.

28 Supplementary Paper No 1

jSj ..

I •.

jIj ° 1

EXECUTIVE SUMMARY

The Labor Government has seen superannuation predominantly as either an increasingly important revenue milch cow or as an increasingly important element of their wage and industrial relations accord. They have not really been driven by the correct motivation for an effective retirement incomes policy.

Even , though the Labor Government has reduced the tax advantage of superannuation, it's concessional treatment currently totals $3.35 billion, which has been heavily concentrated and predominantly to the benefit of the wealthy.

Our °,alternative superannuation policy will, in effect, distribute these tax concessions more equitably and fairly to all Australian individuals and families.

The Coalition will significantly reshape the current superannuation system. Instead of a compulsory lowest common denominator employer-funded approach, we will provide all Australians with a fairer, much more generous incentive driven system based on freedom of choice.

In contrast to Labor, we will:

provide a 25 per cent rebate to ` all individuals on the first $6,000 of contributions per annum whether paid by an employer or member;

in the case of employer contributions, these will be taxed in the hands of the fund at the individual's marginal tax rate less the 25 per cent rebate;

These measures, in effect, replace the inequitable 15 per cent .contributions tax which under Labor has seen high income earners receive substantial tax concessions while low income earners have received little or no benefit;

retain the level of employer contributions already in place at the time of the next election but make no further compulsory increases. Further increases will be on the basis of choice and incentive rather than on Labor's compulsion;

allow those over age 45, who have made minimal superannuation contributions in the previous five years, to "catch up" by contributing a maximum of $30,000 in one year and claiming a maximum rebate of $7,500. This will provide a further incentive for those Australians who, up till now, have chosen not to enter into long term retirement planning;

Supplementary Paper No 2 1,

abolish tax on lump sums and introduce more favourable tax arrangements

on complying annuities which, will be a significant incentive for all Australians to take up superannuation and reap the full financial rewards in retirement;

cap the amount which can be taken in lump sum form at $300,000 (about 10 times AWE but index that cap so that it grows in line with future earnings). This will ensure that high income earners do not have access to massive lump sums at concessional tax rates, and will also encourage the taking of

annuities as a stream of income in retirement;

attempt to . make a . "clean break" with past tax rules, by extending the abolition of the lump sum tax to all accrued lump sum benefits irrespective of whether they are pre or post 1983 entitlements; appropriate transitional arrangements would need to be settled with the industry for those who would already have an entitlement to take a lump sum of more than $300,000;

increase the tax on superannuation fund income from 15 per cent to 25 per cent, maintain the current dividend imputation credit system and consider a rebate mechanism for those in rollover funds;

permit a range of more flexible annuities whilst, at the same time, ensuring minimum criteria are met for complying annuities;

maintain the tax free status of the investment income of annuity funds and ensure that only the income component and not the capital component of the annuity is taxed in the hands of the recipient;

abolish the complex and excessively generous Reasonable Benefits Limits (RBL's) regime. The cap on the tax concessions on contributions removes the need for RBL's, which will go a long way towards returning simplicity to retirement planning;

• introduce a new system of Retirement Savings Accounts in financial institutions thereby extending the range of savings options for retirement planning;

permit individuals to make tax rebatable contributions in respect of their non-working spouses. This recognises the real but unmeasured contribution of the non-working spouse and removes the artificial constraints imposed by

Labor's narrow occupational superannuation system;

allow young Australians to use their superannuation to borrow funds to buy a home. This will be a great incentive for young Australians to take out superannuation in the knowledge that it may be available for home purchase;

provide freedom of choice to individuals to nominate the superannuation fund to which their contributions are paid, restoring choice instead of compulsion;

2 Supplementary Paper No 2

C

encourage employers - and employees to negotiate voluntary . employment •

agreements including the payment of appropriate superannuation contributions beyond the minimum level;

• crack down on "double-dipping" by restricting access to the age pension for those in receipt of lump sums. This `much -needed targeting measure will introduce better integration between the social security and tax systems;

raise the preservation age to 60;

require all superannuation contributions from employers to accumulaion funds to be immediately vested;

over the longer term, move to require , Commonwealth government unfunded superannuation schemes to convert to a fully funded basis;

consult regularly with the industry to ensure the effective implementation of our policies. We will not adopt Labor's abysmal, practice of legislation by press release which has caused so much confusion and misunderstanding, for fund managers, superannuants and retirees alike.

Supplementary Paper No 2 3

2.1 OVERVIEW AND BACKGROUND

As discussed in previous chapters, Labor's long period of economic mismanagement has left Australia in a perilous economic situation, facing a gross shortage of national savings and massive calls on the welfare system. Former Treasurer Paul Keating's superannuation policies have proved to be an abject failure, as witnessed by the frequent changes to the rules, the complexity of the laws and the unsatisfactory outcome.

Moreover, under Labor, superannuation has become a brand new source of taxation revenue with enormous potential for dramatic increases.

Having decided to go down the compulsion path and force employers to contribute 12 per cent by the year 2000 it is only a matter of time before Labor decides to abolish all tax concessions on superannuation.

Labor's policies are also inequitable, providing extremely generous benefits to the upper income groups who need least incentive to save. They are also cost-ineffective, resulting in a massive loss of taxation revenue which will not be compensated for by reductions in future welfare outlays.

In fact, it would be cheaper in most cases for the Government to give everybody an age pension rather than continue to provide the present regime of tax concessions on superannuation. This fact condemns Labor's ill-conceived approach to superannuation, but in itself does not condemn the need for superannuation when the ageing of the population and the need for increased savings are taken into account. It merely highlights the necessity for a more rational and equitable approach to superannuation.

2.2 LABOR'S TRACK RECORD

Since coming to office, Labor has managed to turn superannuation into an extremely complicated, complex and unattractive system, particularly for those on low incomes.

Prior to March 1983, there were no taxes on contributions and fund earnings and tax was only payable on 5 per cent of an individual's lump sum entitlement at the individual's marginal rate.

4 Supplementary Paper No 2

Now, instead of just

one tax, there are six: a 15 per cent tax on employer (including award) contributions and tax deductible employee contributions, a 15 per cent tax on the investment income of funds, a 16.25 per cent tax on lump sums in excess of a tax free threshold for those over 55, a 21.25 per cent tax on lump sums for those under 55, the maintenance of the pre-1983 tax arrangements and a capital gains tax on superannuation fund assets.

Labor has sought to impose a system entirely paid for by employers in which employees have no choice, no commitment and no incentive to save but which will yield vast amounts of new taxation revenue.

Labor has so far increased the tax take from superannuation by an estimated 1000 per cent and this will undoubtedly increase as the revenue base for its new taxes starts to expand. If ever there was proof of Labor's revenue driven approach to superannuation, this is it!

In addition, Labor has revised the concept of reasonable benefit limits for both lump sums and annuities under a system which has attracted widespread criticism because of its administrative complexities and the fact that, in practice,

only very few individuals are affected.

Labor has also changed the treatment of superannuation contribution concessions in an unnecessarily stratified and complicated manner. As a result, there are now quite different taxation rules applying to different categories of employees with employee contributions being treated in a variety of ways.

Labor's complicated and often confusing superannuation tax regime, with its myriad of accompanying rules and regulations has done little to construct a comprehensive, equitable and simple retirement income policy for the nation.

Despite an estimated $3.35 billion a year in superannuation tax concessions (source, Tax Expenditure Statement, December 1990), this Government is struggling to encourage the majority of workers to enter into meaningful superannuation arrangements. In fact, over the life of the Hawke, Government

nearly $22 billion (Tax Expenditure Statements 1983/84 to 1988/90) in concessions have been extended to superannuation. In spite of the enormous concessions, the present system remains an inequitable one, with benefits skewed towards high income earners. For many low income earners there is little justice under Labor's superannuation policies. The following examples illustrate this point:

high income taxpayers receive an immediate tax differential of 33.25 per cent of their contribution while lower income people receive tax assistance of only 6.25 per cent;

older people with substantial periods of qualifying pre-1990 employment are able to receive both lower tax rates on pre-1983 benefits and substantially higher levels of benefits under the RBL regime than younger persons with only short periods of pre-1990 employment;

Supplementary Paper No 2 5

high income, self-employed people are able to shelter the

bulk of their income

from tax by contributing to a superannuation fund. For example in the 1990-91 tax year just ended, individual tax deductions in respect of superannuation contributions in excess of $100,000 were widely claimed by professional and other groups, resulting in tax benefits in excess of $33,000 a year to certain individuals;

the absence of rules governing the amount or source ' of funds for contributions has allowed individuals to contribute more than their annual incomes and claim tax deductions for borrowings, for proceeds of the sale of shares and property and for money taken out of rollover funds.

Labor's superannuation policy has also failed to be adequately integrated with the social security system. Currently people can retire early at age 55, access their superannuation lump sums, dissipate them -and then go on to the age pension.

With an ageing population leading to increased calls on age pension funds, Labor's refusal to bite the bullet on "double-dipping" can no longer be tolerated.

Labor's superannuation policy lacks simplicity. As finance writer Barrie Dunstan complained recently in the Australian Financial Review:

"...there are three categories of employees - unsupported members, award-supported members, and non-award-supported members - all with different rules on tax deductions or tax rebates. Not to mention the different categories of allowable contributions which, in the case of deductible contributions,

requires a tortuous five steps in the calculation..."

The Coalition supports coverage of superannuation for all in the community. Yet despite improvements in coverage over recent years, the fact remains that little more than half of the private sector workforce is presently receiving any superannuation at all.

This contrasts strongly with the public sector where more than 90 per cent are receiving superannuation entitlements.

The introduction of award superannuation in 1985 was supposed to facilitate extensive superannuation coverage of the whole award workforce. Clearly it has not done so. Further, the Labor Government has not significantly encouraged any coverage beyond the paid workforce.

Under the auspices of the ACTU, superannuation has also been treated as an industrial relations issue and not one of retirement income. The ACTU/Labor drive for award superannuation lacks focus, is clearly not productivity based, as was its original intention, and takes no account of the individual employer's

capacity to pay or the rights of individuals to decide where their contributions should be invested. The compulsory system adopted by the Government is not so much a system of saving but the imposition of another form of payroll tax.

6 Supplementary Paper No 2

In the great majority of cases unions decide where superannuation contributions

should go and employers are told into what funds they must contribute.

There are currently many hundreds of award provisions with different dates of implementation. Some cover part-time and casual workers, others do not; some require fixed dollar amounts, others a percentage of salary; some apply only to the

basic rate of pay, others include shift and overtime allowances. To make matters worse, many employers have to comply with a multitude of different awards, even in a single workplace.

Lacking any clear policy direction, Labor has now resorted to force, to ram their inadequate, inequitable and inefficient superannuation policy down the throats of average Australians. According to Labor, ordinary Australians don't know what is good for them - too shortsighted to recognise the national interest, too selfish to save for their own retirement.

Moreover, Labor's ten year program for compulsory superannuation, to be introduced from July 1992, will have dire economic consequences for the nation -not only the loss of some 70,000 new jobs but significantly higher inflation. The end result of Labor's timetable will be ever increasing government-determined

minimum levels of retirement income which have little to do with Australians' retirement needs and aspirations. And because Labor is determined to preserve a redundant award system with monopoly rights for union sponsored industry funds, there will be a potentially dangerous concentration of financial power in the hands of a few.

With $450 billion-$600 billion in assets estimated to be held in superannuation funds by the year 2000, this raises very real concerns regarding:

concentration of financial power; and

political involvement in superannuation fund investment.

Either outcome would not be in the best interests of ordinary Australians planning for their retirement.

Moreover, this concentration of economic and political power will have major implications for the ownership and control of Australian companies and the direction of national savings into particular investment avenues.

Superannuation must not be the milch cow which governments can use whenever they need revenue or to foster what they believe to be "socially desirable" or "national interest" projects. It must be, and will be, under a Coalition

Government, a means of ensuring a primary savings vehicle providing all Australians with the opportunity to maximise their investment returns and retirement savings, such as to make an adequate provision for their retirment.

Supplementary Paper No 2 7

2.3 THE COALITION'S GOALS

Labor's superannuation approach is fundamentally flawed - it forces employers to make the bulk of contributions, regardless of economic circumstances and absolves employees from any responsibility for funding for their own retirement. Instead, the Coalition will offer a much more balanced and incentive driven approach. We will retain the minimum contribution levels actually in place at the time of the next elections as a floor on which to build. Generous tax incentives will be available to encourage employees to make additional provision to suit their own retirement needs.

Our policy will provide more incentive to those Australians requiring the most .help to save for their retirement - the lower income people who have been ignored by Labor.

As is well known, but not freely admitted by this government, current superannuation arrangements have severely penalised lower income workers by the imposition of a flat rate 15 per cent contributions tax. At the same time, substantial subsidies have been provided to higher income tax payers - a 33.25 per cent differential compared to a 6.25 per cent differential for low income persons.

Compared to the present system, our proposals will reduce the level of subsidy to high income groups while giving low income earners greater incentive to contribute to their own superannuation.

Individuals can, of course, contribute more than $6,000 if they wish, but these contributions will not receive any rebates.

These changes, along with those contained in our tax reform package, will help restore equity to the Australian tax system and provide assistance to those Australians needing the greatest financial help to save. Both the individual and the nation will substantially benefit from the Coalition's superannuation and

savings initiatives.

2.4 OUR, POLICIES

Labor's approach involves taxation imposts at three different levels. Our approach will offer generous incentives together with a dramatic simplification of the current regime.

8 Supplementary Paper No 2

2.4.1 The Tax Treatment of Contributions

(a) Employee Contributions - Rebates Rather Than Deductions

Under the current rules, while some taxpayers can claim a tax deduction for some or all of their contributions, many are limited to modest rebates, and most receive no tax concessions at _ all. The Coalition's policies will treat all contributions in a consistent manner. Tax deductions are inequitable because they have a higher value to taxpayers subject to higher marginal rates of income tax. The Coalition's superannuation policy will therefore offer a uniform system of tax rebates rather than the current mishmash of tax deductions and rebates.

Employee or self-employed contributions, which are paid out of after tax incomes, will attract a flat 25 per cent rebate in the hands of the member up to the first $6,000 of total superanuation contributions.

This will reduce the value per dollar of contributions to high income groups and increase the value to low income groups as demonstrated in the following table:

TABLE 2.1

THE MARGINAL TAX GAIN FOR CONTRIBUTIONS

Taxable Income $

Under Labor marginal tax rate less 15% contribution tax %

Under Coalition Flat Rebate -no contributions tax %

15,000 6.25 25

25,000 24.25 25

35,000 24.25 25

45,000 32.25 25

55,000 33.25 25

Table 2.2 illustrates what the 25 . per cent tax rebate would be worth in dollar terms to employees at various contribution levels.

Supplementary Paper No 2 9

TABLE 2.2

Employee or Self-employed Contributions

Amount Rebate

$ 1,000 25% x 1,000 = $ 250

$ 3,000 25% x 3,000 = $ 750

$ 6,000 25% x 6,000 = $1,500

$10,000 25% x 6,000 = $1,500

(b) The Tax Treatment Of Employer Contributions

All employer contributions up to $6,000 in respect of an individual, will be taxed in the hands of the superannuation fund at the individual's marginal tax rate based on their salary as notified by the employer, less a 25 per cent rebate. However, where the contributions exceed $6,000 in respect of any one individual, the excess contributions will be taxed in the hands of the fund at the marginal tax rate according to the individual's wage or salary. As can be seen from the Table 2.3, most income groups will be significantly better off.

TABLE 2.3

THE TAX ON EMPLOYER CONTRIBUTIONS UP TO $6,000

Taxable Income Under Labor Under Coalition

$15,000 15 (8.8)% (credit)

$25,000 15 5

$35,000 15 5

$45,000 15 5

$55,000 15 20*

* This rate will apply as from 1 October 1994 reducing down to 11 per cent from 1 January 1996.

To the extent that an individual's actual tax rate varies from the rate applied by the superannuation fund, the individual will be required to make the necessary adjustment in his/her tax return in a similar manner to the way adjustments are made to PAYE tax. When the actual marginal tax rate is less than 25 per cent, the individual will be entitled to a tax credit or refund.

10 Supplementary Paper No 2

(c)

Employer Contributions - Fully Deductible

Employers will still be able to claim a tax deduction for all their contributions to a superannuation fund, including those in excess of $6,000 pa.

(d) Treatment Of Defined Benefits Funds

The Coalition will discuss with the superannuation industry the most effective and equitable manner to treat defined benefit superannuation funds.

However, one possible approach that may be appropriate for many defined benefit funds is as follows:

At the annual review date for each fund, the tax rate for the employer contributions to the fund for the next year is determined, based on the salaries of the current members and allowing for the .rebate.

At the end of each year, each member is provided with a certificate showing the amount of notional employer contributions and the level of rebate claimed, as discussed in the treatment of employer contributions above.

A similar approach could also be considered for unfunded defined benefit funds.

2.4.2 A Cap On The Rebate

The Coalition will set a cap of $1500: (AWE indexed) on the total annual rebate available to any one individual in respect of his/her own and any employer contributions. This is equal to a tax rebate of 25 per cent on an annually indexed contribution of $6,000. Individuals or employers , will be able to - make contributions in excess of this ceiling but they will not receive tax rebates. High

income earners are likely to have access to other equally attractive savings options and will also be constrained by the new ceiling on lump sums.

This proposed cap on the level of tax concessional contributions is pitched at a level of approximately 20 per cent of average annual earnings. (currently around $30,000). This will allow all those with a capacity to save to make a substantial tax assisted contribution in each year.

This initiative will significantly limit the generous tax concessions available to higher income earners currently using superannuation as a tax shelter, while making it significantly more attractive for those who most need encouragement.

For those individuals over age 45 who have not made major contributions to a superannuation fund in the previous five years, the Coalition will allow them to "catch-up" by contributing a maximum of $30,000 in one year less any contributions made in the previous years and claim a maximum rebate of $7,500.

Supplementary Paper No 2 11

Under this proposal, individuals will be allowed to carry forward any unutilised

rebates into the next year for a maximum period of 5 years.

Table 2.6 shows the positive impact the Coalition's proposals will have on the vast majority of Australians planning for their retirement.

2.4.3 Abolition Of The Taxes On Final Benefits And The Problem Of Transitional Arrangements

Australia is the only country in the western world which imposes superannuation taxes at three levels - on contributions, on fund earnings and end benefits. This combination has had a serious disincentive effect, particularly on those facing a significant tax penalty on their final payout.

The Coalition is firmly committed to implementing a simplified tax system for superannuation.

The superannuation industry seems to believe that although simplification of the system necessarily brings with it a degree of difficulty, such difficulty is acceptable. As Ken Lockery, current Vice-President of ASFA, said in a speech to the industry in 1990:

"There is no doubt that administrative simplification is both necessary and important. Such simplification would reduce the ever increasing expenses of superannuation funds and thus, more effectively. deliver the available tax concessions to members and plan sponsors. However in the short term it

must be recognised that any simplification of superannuation involves change, and change of itself produces extra problems and costs for the Industry. In the short term administrative simplification will be painful and costly -

ho pe fully the longer term benefits will make it worthwhile." He went on to say:

"... the three main industry bodies, i.e., ASFA, LIFA and the Institute of Actuaries have all given Treasury an undertaking to wholeheartedly support major simplifications to the system, even though some people must be disadvantaged by such changes."

We must ensure that, where possible, a "clean break" can be made with past policies. Only by doing that, can both the industry and the superannuant be guaranteed of a simplified environment in which to manage and plan for retirement needs.

On gaining office, the tax payable on lump sums will be abolished.

12 Supplementary Paper No 2

However, our commitment to abolish the tax on lump sum benefits would holdout

the possibility of further complicating, rather than simplifying, the administration of superannuation if it was done for only future benefits.

With pre and post 1983 taxes on superannuation to be taken into account in calculating an individual's lump sum benefit, it is currently an administrative nightmare. Consequently abolition of lump sum tax on future benefits would only complicate the system even more.

The Coalition is therefore very strongly attracted to abolishing the lump sum tax on all accrued lump sum benefits, irrespective of whether they are pre or post 1983 entitlements.

On this basis, total lump sums would be capped at $300,000 and amounts in excess of $300,000 would have to be taken as an annuity.

The Coalition will work with industry to develop simple but equitable transitional arrangements for those expecting to receive lump sums in excess of $300,000 within five years of the Coalition gaining office,

The abolition of the tax on lump sums would mean a significant financial boost for most average Australians: those about to retire and those making long term financial plans for their retirement.

Working off official Treasury estimates of the cost of superannuation tax concessions (see Table 2.5) the Coalition believes that the abolition of tax on all lump sums as well as other changes are possible within the context of the total tax concessions identified by Treasury.

2.4.4 A 25 Per Cent Tax Rate On Fund Income

As the package involves the removal of the tax on final benefits and a new and generous contributions regime, the Coalition has decided to increase the tax rate applicable to superannuation and rollover fund income from 15 per cent to 25 per cent.

For most taxpayers, the 25 per cent tax rate will still represent a significant concessional rate of tax compared to the individual tax rates. This advantage will be substantially compounded over time.

The current dividend imputation credit system will be retained and can be expected to continue to significantly reduce the effective level of tax paid on fund income. Most funds could expect to pay in the order of 17 per cent, close to the

bottom marginal rate of tax.

However, the investment income generated by funds in respect of annuities will remain tax free.

Supplementary. Paper No 2 13

2.4.5 Rollover Relief

The Coalition will discuss with industry the desirability of providing a tax rebate of 10 per cent of rollover income up to a cap of $1,000 a year for individuals not receiving the benefit of any tax rebatable contributions to a fund in a given year. This could be of particular benefit to individuals who receive income from a rollover fund but who have no claim to rebates on contributions.

2.4.6 Freedom Of Choice And Transitional Arrangements

By the time of the next election, it is likely that there will be minimum statutory contribution levels for employers due to the imposition of Labor's superannuation guarantee levy.

We will maintain minimum levels of employer contributions in place at the time of the next election.

A most important transitional consideration will relate to the treatment of what (by the time we attain office) will presumably be legislated, compulsory occupational superannuation - promising 3-5 per cent.

The Coalition will ensure that all existing entitlements are protected and preserved, but will not legislate for any further increases in the compulsory levy. Rather, individuals will be encouraged by way of our tax rebate, to increase contributions beyond their employer legislated levels, either personally or as a result of negotiations with their employer - preferably as part of a workplace

agreement.

In this regard, it is important to recognise that someone on average earnings (say $30,000) would still be able to make a further contribution of up to $4,500 and still receive the 25 cent rebate - a strong incentive to do more for oneself.

We will also legislate to ensure that employers can satisfy all their minimum award obligations by contributing to any complying scheme of an employee's choice and make it illegal for any award provision to limit this right.

Individual employees will also be permitted to opt for their accrued entitlements in any superannuation fund to be transferred to any other complying scheme. The Coalition will discuss with industry the most appropriate administrative

arrangements for this proposal. One option would be to allow a transfer from any one fund to another chosen fund once a year.

In practice, most employees would choose to remain with their existing industry fund or to move to their employer's enterprise fund, especially as additional administration costs would be involved in such transfers. However, it is very much in the interests of employees that there should be competition and choice between funds.

14 Supplementary Paper No 2

4

The new restructured tax arrangements, coupled with the minimum employer.

contribution "floor" will provide significant tax advantages in comparison to the existing system and alternative savings vehicles.

As one illustration of the benefits of the Coalition's superannuation proposals, the Table 2.4 compares the accumulation after 30 years of an employer contribution of five per cent of salary under the Coalition's and Government's arrangements and the alternative of saving through a bank account.

TABLE 2.4

Income Coalition Super Government Super Bank Account

10,000 89,104 78,416 69,278

15,000 133,656 117,623 103,917

20,000 178,208 156,831 138,557

25,000 194,505 193,494 123,372

30,000 233,407 226,821 148,047

45,000 350,110 326,701 222,070

60,000 437,330 426,781 253,114

80,000 550,348 560,087 294,451

100,000 687,935 693,394 368,064

Basic Assumptions:

Long term earning rate 8 per cent per annum.

Salary escalation rate 5 per cent per annum.

Tax rate on super funds reduced by 8 per cent due to dividend imputation.

The tax credit for incomes less than $20,700 is also accumulated until the end of the period.

2.4.7 Retirement Savings Accounts And Other Savings Options

We will introduce a new system of Retirement Savings Accounts at financial institutions.

Arrangements will be put in place, including any necessary changes to present prudential arrangements, to ensure that the Retirement Savings Accounts can be managed by a wide range of financial institutions, including banks and building societies.

Supplementary Paper No 2 15

The superannuation taxation concessions outlined above will be available to all

those establishing Retirement :Savings Accounts which are vested and preserved for retirement purposes.

Our objective is twofold - to expand the range of choice available to individuals and to allow banks and financial institutions to compete with superannuation funds in the provision of superannuation schemes.

The Coalition is worried about the potential concentration of power with superannuation being concentrated in the hands of just a few major funds which would have important implications for the development of the financial system as a whole and the ownership and control of Australian industry.

(a) Superannuation For Those Outside The Workforce

Under present arrangements superannuation is largely workforce based. Those leaving the workforce can only continue to contribute to a superannuation fund for a maximum of two years, while those who have never been in the workforce cannot contribute at all.

As a major initiative to assist women in particular, the Coalition will allow spouses, either in a married or defacto relationship, to make tax rebatable contributions in respect of themselves and their partner. Such contributions will be immediately vested and preserved in the name of the beneficiary. The maximum rebatable amount will be $1,500 a year in respect of a maximum annual contribution of $6,000 a year. This rebate, raised by the spouse in whose name the contributions are made will be in addition to $1,500 rebate available to all individuals in respect of their own superannuation arrangements. The maximum rebatable contribution that can be made by a married/defacto couple will be

$12,000 per annum.

The Coalition will allow banks and other approved financial institutions to offer Retirement Savings Accounts (RSAs) for this purpose, subject to the same rules governing superannuation funds.

(b) Part Time And Casual Employees

Part time, casual and temporary employees, as well as those persons outside the workforce, will be able to contribute to superannuation funds or Retirement Savings Accounts (RSAs) subject to the same rules governing superannuation

funds. They will also be able to transfer any accrued entitlements to RSAs.

2.4.8 A Ceiling On Lump Sum Payouts

The Coalition will cap the amount of superannuation and rollover benefits which can be taken in lump sum form as follows:

16 Supplementary Paper No 2

any amount up

to twice average annual earnings (currently around $60,000) • will be able to be taken in lump sum form;

• where the entitlement exceeds twice average annual earnings, the lump sum will be limited to $60,000 plus one half of the remaining benefit subject to a total maximum lump sum benefit of $300,000 indexed.

To prevent the growing incidence of double-dipping whereby recipients can dissipate their lump sums or rearrange their assets to still ;qualify for the age pension, income will be deemed on lump sums in excess of $60,000 and will be taken into account for the purposes of the age pension income test.

In cases of exceptional hardship, the Department of Social Security will not deem income to have been received eg. where a building society has gone bankrupt or in cases of serious personal hardship.

These proposals should be considered in the context of the proposed changes in the treatment of superannuation annuities and pensions outlined below. .

2.4.9 A More Generous And Flexible Approach To Annuities

In order to encourage all retired people to utilise their retirement savings to provide a safe and guaranteed stream of income in retirement, the range of complying pensions and annuities will be expanded by:

removing the requirement for all monies to be withdrawn from rollover funds at the age of 65. However, these monies will be taken into account for age pension assessment;

introducing new annuity options such as variable annuities;

as a further incentive to encourage the taking of annuities, investment income of funds providing complying annuities will remain untaxed;

allowing monies received by way of complying annuities to be taken with tax payable only on the income component;

allowing a flexible program of withdrawals subject to protection from unjustified claims against the social security system.

2.4.10 Abolition Of Reasonable Benefit Limits Regime

The introduction of a firm limit on tax concessional contributions will enable the removal of the current extraordinarily complex.and confusing Reasonable Benefit Limits regime.

Supplementary Paper No 2 17

2.4.11 A Commitment To Full Vesting And Preservation

The purpose of superannuation should be to provide income for the genuine retirement years. Yet Labor's refusal to extend the coverage of preserved benefits, and to close off blatant double-dipping loopholes, together with its strong support for the ACTU drive for early retirement, have heavily undermined this basic objective.

The Coalition will therefore raise the preservation age to 60 years as from 1 July 1994. The need for any further increase will depend upon future savings patterns. The coverage of preserved benefits will be extended as follows:

all superannuation funds will be required to determine a member's existing non preserved vested entitlement as at 1 July 1994;

thereafter, this sum, indexed to AWE, will be able to be withdrawn at any time upon genuine termination of employment. However, prior to age 60, this amount, less any non tax deductible contributions as at 1 July 1994, will be taxed at 20 per cent;

otherwise, subject to limited exceptions in the event of premature permanent retirement from the work force, all entitlements will be preserved to age 60.

Those who are required by statute or industrial awards to retire at an early age (e.g. Defence personnel) will continue to be entitled to access their benefits at the specified age under existing arrangements. However, other aspects of our policy

will apply to such schemes.

Currently only award contributions, employee and, in rare cases, employer contributions are immediately vested, leaving many employees captive to excessively long qualifying periods. However, workers should be entitled to vesting of non-compulsory employer contributions in the build-up of their income for retirement.

The Coalition will therefore maintain full and immediate vesting for all employee and minimum employer contributions and will introduce the same vesting requirements for all employer contributions to accumulation funds. For defined benefit schemes a progressive five year vesting regime will be introduced.

18 Supplementary Paper No 2

2.4.12

An Emphasis On Safety And Security Of Savings

The Coalition will ensure that contributors' retirement savings are managed and invested in accordance with the best possible prudential standards. The regulatory controls will be directed towards protecting the assets of investors and ensuring the efficient and low cost operation of funds. Superannuation funds will be made more accountable to superannuants and. they will be required to make

regular public disclosure of the true nature and extent of all management and administration costs.

While the Coalition will not countenance any attempts to direct funds to invest in national interest or socially desirable projects or activities, we will ; encourage superannuation fund managers and trustees to become more "long term" in their investment strategies.

The ISC will be required to exercise close scrutiny of portfolio balances and investment strategies of all major funds and to report to Parliament with assessments and recommendations on all aspects of superannuation fund practice.

The Coalition will not seek to inhibit the investment practices of superannuation fund trustees but it will require that members are made fully aware of all major investment decisions and their implications.

2.4.13 Measures To Benefit Younger Australians

Labor's superannuation policies have been unfairly directed in favour of higher income and older Australians with an already well established capacity to save for their own retirement. Those already owning their own homes generally have a much greater capacity to save for their retirement than young people with families

and/or mortgage commitments.

The abolition of the tax on lump sum benefits will be of great benefit to younger people in the future not able to take advantage of very low lump sum tax rates applicable to benefits accruing in respect of pre 1983 employment.

Young people will also benefit from the following measure:

2.4.14 Access To Superannuation Funds By First Home Buyers

To encourage young people to take out superannuation, funds will be permitted to allow those under the age of 35 to have access to up to 75 per cent of their accumulated vested superannuation benefit for the purpose of a deposit or part deposit for a home. This will be required to be repaid over a maximum term of 25 years at commercial rates and will be secured against the home. Where the

balance of the purchase monies have been borrowed, and secured by first mortgage, the superannuation fund can be secured by a second mortgage.

Supplementary Paper No 2 19

Upon permanent retirement or genuine resignation, the person's entitlement

would be reduced by any amount outstanding. This amount will be considered part of the lump sum limit.

This measure will help to remove the present conflict between saving to achieve home ownership and saving for retirement. Fund trustees will be able to require borrowers to take out mortgage insurance.

2.4.15 An Additional Tax On Unfunded Benefits

The current liability of unfunded super schemes particularly within the public sector has reached alarming proportions. Estimates of total unfunded liabilities are in the order of $80 billion.

The Coalition believes that, as a matter of principle, all employer sponsored superannuation funds should be operated on a fully funded basis. To this end, our long term objective will be to gradually convert all remaining unfunded superannuation schemes to a fully funded basis, commencing with superannuation contributions for newly recruited personnel.

In order to discourage other unfunded schemes, the Coalition will examine ways of levying additional tax to discourage continuing unfunded arrangements.

2.4.16 Transitional Arrangements

In view of the complexities in superannuation policy which have arisen in recent years, it is now very difficult even for acknowledged experts to anticipate every implication and consequence of proposed policy changes.

It will, therefore, be necessary for the Coalition to ensure that in government all its new initiatives are able to be implemented in a fair and effective manner.

The Coalition will, therefore, be consulting directly with the industry, both before and after the next election.

2.4.17 Aggregate Cost To Revenue

The impact of the Coalition's proposals on budgetary outlays will be revenue neutral, both in the short and long term.

Table 2.5 sets out the tax expenditure figures for 1989-90 under the Government's arrangements and the Coalition's proposals.

20 Supplementary Paper No 2

TABLE 2.5

Item

Government' $M

Coalition $M

Costs

Under .taxation of employer contributions 1420 11412

Deduction of self-employed contributions 390 3

Under taxation of fund earnings 1680 4934

Under taxation of unfunded lump sum benefits 570 250

Rebates to employees and self-employed 6 9757

Sub-total 4060 2859

Offsets

Tax on funded pensions 395

Tax on funded lump sums pre-1983 service 55

Tax on funded lump sums post-1983 260

Sub-total 710

Total Tax Expenditure 3350

Notes:

1. Source, Tax Expenditure Statement, December 1990, Table B1, p55. It is assumed that the Treasury used an average marginal tax rate for superannuation members of 40 per cent.

2. Assuming an actual rate of 12 per cent on all current employer contributions, the current system has a subsidy of 28 per cent (i.e. 40 per cent-12 per cent). This suggests total employer contributions of 1540/0.28 = $5.5 billion. Under Coalition policy the average marginal tax rate for current fund members will come down to 32 per cent. Therefore the normal tax take is .32 times $5.5 billion = $1.76 billion. However about 83 per cent of these contributions will be subject to a rebate of 25 per cent while about 17 per cent (assuming no change in the level of employer contributions) will be subject to marginal tax rates. Therefore the cost of supporting employer contributions is 25 per cent x 83 per cent x

5.5 billion = 1141 million.

3. As deductions will be abolished this figure will become zero. However these contributions will be eligible for rebates.

Supplementary Paper No 2 21

4. Based on an assumed average marginal tax rate of 40 per cent and a fund tax rate of

15 per cent, this suggests support of 25 per cent. Therefore the level of fund earnings is 1760/.25 = $7040 million. Under Coalition policy the average tax rate is 32 per cent and the fund earning rate is 25 per cent. Therefore the undertaxation of fund earnings is 7 per cent of 7040 million or 493 million.

5. This figure is difficult to estimate. However under the proposals, it is reasonable to assume the amount of unfunded benefits and golden handshakes will reduce as there will be no incentive to provide them.

6. This figure was zero for 1989/90 but there will be some rebates for low income earners in the Government's figures for 1990/91 and onwards.

7. It has been estimated that the level of employee contributions is $3.4 billion. If another 500 million of contributions for the self-employed are alloed for (lower than the current figures which are inflated due to the generous concessions), the cost of the 25 per cent rebate, assuming all employees are able to claim = .25 x $3.9 billion = $975 million.

TABLE 2.6

A TYPICAL EMPLOYER SPONSORED SCHEME WITH 8% EMPLOYER AND 4% EMPLOYEE CONTRIBUTION RATES

Income Contributions

Employee Employer

Value of 25% tax Rebate to member

Coalition Labor

Effective Tax on Employer Contributions * Coalition Labor

End Benefit After 30 years

Coalition Labor

10,000 400 800 170 100 nil 96 175,828 174,846

20,000 800 1600 240 200 nil 192 351,656 333,068

30,000 1200 2400 300 - 120 288 491,722 434,876

40,000 1600 3200 400 - 160 384 655,629 570,881

50,000 2000 4000 500 - 200 480 798,620 708,886

**100,000 8000 - 1780 960 1,295,539 1,386,913

* Assumes effective tax on contributions of 12 per cent taking account of deductions for administrative expenses and death and disability cover.

** Assumes employer contributes the full $8,000.

22 Supplementary Paper No 2

SUPPLEMENTARY PAPER NO 3

HEALTH

EXECUTIVE SUMMARY

REFORM OF MEDICARE

Medicare is fundamentally flawed and must be reformed. By providing virtually 'free' services at the point of delivery without regard to the patient's , means Medicare has encouraged overuse and discouraged private insurance. It has produced long waiting lists in public hospitals while private hospitals have remained half empty. Furthermore it has failed to tackle gross inefficiencies in the public hospital systems, which are poorly managed and riddled with restrictive work practices.

The Liberal and National Parties will transform Medicare into a viable, stable system of quality health care, defining its objectives clearly, but phasing in the changes to make them both affordable and easy to absorb.

DIRECTION OF REFORMS

A Liberal-National government will retain but improve Medicare and place greater responsibility on individuals and families for their own health care, whilst providing them with the means to do so. It will more clearly separate the roles of Federal and State governments, giving the latter full legislative responsibility for the delivery of health services and providing them with the necessary financial

resources. It will also progressively expand the role of the private sector in service delivery, and restore the viability of private medical practice and private health insurance.

Measures Affecting Individuals and Families

Medicare will be retained and significantly improved. It will remain a system of universal health cover.

We will restore the balance between the public and private sectors by encouraging individuals to provide for their own health care by taking out private health insurance. A series of financial subsidies will be offered which will be heavily weighted to those on low incomes and the aged.

Supplementary Paper No 3 '1

Income

Group : Credits,

(Aged less than 65 years)

Less than $12,000 $200 per single

$400 per family

$12,000-$20,000 $150per single

$300 per family

$20,000-$30,000 $100 per single

$200 per family

Income Group Credits

(Aged More than 65 years)

Less than $12,000 (single) $400 per single

Less than $14,500 (married) $800 per family

$12,000 - $20,000 (single) $250 per single

$14,500 - $20,000 (married) $500 per family

$20,000 - $30,000 $200 per single

$400 per family

Higher income earners who do not take out private health insurance and who occupy public beds are denying pensioners and the disadvantaged access to those beds. We will encourage higher income earners to take out private health insurance by requiring those with family incomes of greater than $50,000 per annum (singles $40,000 per annum) to either take out private health insurance or pay a surcharge on the Medicare levy approximately equivalent to the cost of private health insurance. The amounts payable under this surcharge will be $800 per family and $400 per single. These surcharges will be completely avoided by taking out private health insurance and will be tapered in over the preceding $5,000 of income. Insurers will be able to provide catastrophe insurance at close to half the cost of these charges.

The Government monopoly on medical insurance (i.e. cover for medical items rather than hospital charges, which are already coverable under private insurance) will be discontinued. Two components will be available via the private health funds:

- the funds will be able to act as agents of Medicare; and

2 Supplementary Paper No 3

the funds will be able to offer additional medical cover up, to

a. higher

schedule level which they will negotiate with the Australian Medical Association (AMA). Gap insurance will allow the funds to offer different levels of cover up to the AMA schedule level, but they will not be allowed to rebate more than 85 per cent of the fees, leaving the patient to pay a co-payment. The maximum co-payment per item will be $30 and the maximum co-payments 'per annum will be $300 per family.

For in-patients, fees up to the Medicare Schedule .Fee will be fully insurable, as at present. Fees charged above this level, up to the AMA Schedule, will be coverable by insurance from the private funds.

The maximum cover allowable for the excess amount of the fees will be 85 per cent, subject to maximum patient co-payments of $30 per item of $300 per family per year.

Bulk billing will be retained for the more than four million pensioners, veterans, war widows, health care card holders and the disabled. Bulk billing will no longer be available for the rest of the population.

The current Medicare rebates of 85 per cent for pensioners and others who are bulk billed will remain. The rebates for inpatient services will remain at 75 per cent; rebates for non inpatient services (excluding pathology which

will remain at 70 per cent) will also be 75 per cent of the Medicare Schedule fee.

To. assist , those who have made provision for the bulk or all of their retirement, particularly in respect of health care needs, the Coalition will extend the Pharmaceutical Benefits Concession (PBC) Card to people aged 65 and over who are not currently in receipt , of any Government concessions. This will be worth an average of $5 per week for individuals.

The Liberal and National Parties will allow pharmacies to act as agents for Medicare. This will significantly improve access to Medicare, particularly for those living in isolated areas.

Subject to appropriate prudential provisions, the health insurance market will be freed of the red tape and bureaucracy which currently constrains it. We will encourage, for example, the availability of catastrophe, whereby individuals will accept responsibility for the first $500-$1000 or so of their health bills each year and receive full cover for any expenses over this level. In return, premiums for this type of policy are much lower, approaching 50 per cent of standard premiums for the . above example. These options will be particularly attractive to those who are healthy and/or who have higher incomes.

We will maintain the principles of community rating to protect the elderly and the chronically sick in our society.

Supplementary Paper No 3 3:

There will be no

reduction in services or benefits for war veterans, war widows, pensioners and welfare beneficiaries.

Measures Affecting Delivery System

Specific measures affecting the health care delivery system will include:

• new agreements with the States requiring a program of microeconomic reform in hospitals.

• closer control of number of doctors entering practice through medical schools and migration;

implementation of the Baume Report on drug evaluation;

Public Health Measures

Public health measures to be introduced will include:

• development of goals and targets for Australia's health;

• priority for AIDS programs, including research, drug availability and public education;

• close attention to women's health, including $8 million for mobile mammography/densitometry units;

practical focus on Aboriginal health programs;

• new national mental health strategy to be developed;

• $2 million program for remote area nursing training scheme;

an additional $10 million to widen the current scope of the respite care program for those suffering from dementia;

increase the excise on tobacco as a means of reducing the level of tobacco-related disease in the community.

Medical Research

Medical research will continue to be strongly supported, to maintain Australia's record of excellence in this area.

0

4 Supplementary Paper No 3

The Challenge Ahead

Changing Australia's health system to one more. reliant an individual and private initiative and less on government, while improving service quality requires fundamental reform at many levels. The challenge for the Coalition is to bring

about the changes in a predictable, orderly manner, with minimum disruption, and with clear objectives in mind.

There is no reason why Australia's prevention and care system cannot be the best in the world. This policy marks out the essential first steps in that direction.

Supplementary Paper No 3 5

SUPPLEMENTARY PAPER NO 3

HEALTH

In its stewardship of the nation's health the Hawke Labor government has repeated the same kind of mistakes that it has made in its management of the economy. Just as its sloganistic approach to the rapid creation of jobs led to

massive debt and ultimately the destruction of the jobs it artificially created, so too has the policy of so-called 'free' health care led to a grossly inefficient and unstable health care delivery system that can no longer be sustained.

3.1 THE NEED FOR REFORM OF MEDICARE

Broad public acceptance of the immediately attractive elements of Medicare, such as its universality and the availability of 'free' medical and hospital services has until recently masked the serious deficiencies of the system. Concerns now expressed by the public about Medicare, such as:

hospital waiting lists;

the rising cost of private health insurance; and

the gap between bills and benefits, especially for operations;

are merely symptoms of much deeper problems. Indeed the government itself has recognised that something has gone badly wrong by setting up the Macklin enquiry into the health care system.

Medicare in its present form is unstable and badly in need of reform. Its flaws derive from its original design, and are fundamental in nature.

It misleads the public about the true cost of health services by providing them virtually 'free' at the point of delivery after payment of a Medicare Levy which covers only one eighth of the real cost to federal, state and local

governments of providing those services.

As the payment of the Medicare Levy is not directly related to the use of health care services there is no price disincentive to prevent overuse -indeed many have concluded that since they have to pay the Levy they may as well use health care services as much as possible.

6 Supplementary Paper No 3

By discouraging self provision through private insurance or direct payment

for services it places a disproportionate burden of the nation's health costs onto the taxpayer. As taxpayers' funds become, increasingly scarce, the system becomes starved of resources, resulting in rationing of services, run-down and dilapidated hospitals, excessive burdens on health professionals and deteriorating quality of services.

• By promoting the bulk billing of doctors' accounts, especially in the context of an excess supply of doctors, Medicare has encouraged over use of services by patients, and over servicing by doctors. The result is a deterioration in the quality of medical practice, devaluation of the medical profession and

a squeeze on the incomes of conscientious general practitioners.

Medicare has totally failed to remedy the widespread deficiencies in the hospital systems in the states. These include the general over-supply but regional maldistribution of hospital beds; under capitalisation of public hospitals and underutilisation of private hospitals; and gross inefficiencies in public hospitals due to poor management systems and restrictive work practices. Labor's bias towards public sector provision of services and trade union control of workplaces compounds the inefficiencies of the system.

The provision of 'free' hospital services to all, regardless of means, has led to a scarcity of beds for the genuinely needy, particularly the less well off aged. It is also unfair to those who have taken out private insurance to see people of equal or greater means enjoying free treatment. Additionally it

has pushed up private insurance costs because the insurance funds are left with a higher proportion of high risk cases as the healthier, younger people drop their insurance. This debilitating cycle makes the private insurance funds increasingly unstable, and threatens their survival.

Medicare has failed to tackle the problem of an over supply of doctors, which occurs particularly in general practice. In a heavily subsidised scheme, costs tend to be related to the number of doctors in practice, and no credible attempt has been made to reduce the flow of new practitioners

from medical schools or migration.

Finally Medicare has added to the overlapping and confusion of responsibilities between state and federal governments, thus reducing the incentives to carry out essential reforms. This is most evident in the failure to tackle the basic problems in Australia's hospital systems, where the

confusion between funding and management responsibilities is greatest.

The next Australian government faces the choice of continuing to patch up the system, leading to even greater problems in the future, or moving over time to transform Medicare into a viable, stable system of quality health care. The Coalition will take the latter course, defining its forward objectives clearly, but phasing in the changes to make them both affordable and easy to absorb.

Supplementary Paper No 3 7

3.2''THE ROLES OF INDIVIDUALS AND FAMILIES

In line with Coalition objectives in all areas of Australian life, the responsibility ofindividuals and families in maintaining healthy lifestyles and accepting greater responsibility for their own health care will be brought into sharper focus.

Under Labor, Australians have been encouraged to believe that health care is comparatively costless, and that the state has the prime responsibility for people's health and welfare. Over time these entrenched attitudes must be changed, and the proper balance between individual and family responsibility on the one hand

and the responsibilities of government on the other must be brought into proper balance.

3.3. ROLES OF FEDERAL, STATE AND LOCAL GOVERNMENT

There is a need to define more clearly than at present the respective roles of Federal, State and local government.

Under a Liberal-National government the role of the Federal government will be to:

• set broad national goals for the health of Australians, with specific goals for Aboriginal health;

• promote positive health measures of national importance, such as prevention of AIDS and drug abuse;

maintain Australia's international responsibilities in health, and preventative measures with international dimensions, such as quarantine and immigration;

• promote research into health issues, and maintain Australia's leading position in bio-medical research;

• control the approval and performance monitoring of therapeutic substances;

maintain cooperative mechanisms with the States, such as through the ministerial council and the National Health and Medical Research Council, to improve the quality of health prevention and care throughout Australia;

• establish and maintain the governmental financial and insurance framework that will enable the States and non-government providers to carry out their responsibilities in health most effectively.

The role of the States, assisted where appropriate by local government, will be to assume full legislative and financial responsibility' for the delivery of preventive and curative health measures to the public.

8 Supplementary Paper No 3

This will require changes to the Federal-State funding mechanisms to give the

States adequate access to the resources they need, both public and private, to carry out their task.

We are also committed, over time, to the transfer of all Commonwealth Repatriation General Hospitals (RGHs) to the States. We will ensure that this process, now underway, does not diminish the quality of health care nor the priority of access currently granted to veterans.

This policy will be implemented in full consultation with the RSL and other veterans' organisations.

3.4 ROLE OF THE PRIVATE SECTOR

Over time the Coalition will reduce the dominance of government in the nation's health. As individuals and families are provided under our taxation and social security policies with greater choice in the disposal of their incomes, and as a restored economy encourages private investment in the provision of worthwhile goods and services, more and more elements of health care delivery will be capable

of being provided more efficiently, more effectively and at lower cost by the private sector.

There is a myth among many health professionals that only governments can provide services of such fundamental importance to the public welfare as health. Yet the experience of recent years has shown that the dead hand of public sector management leads in the end to a deterioration of service to the public, and to the

demoralisation of the professionals and other workers in the system. The States have the prime role both of reforming the public sector institutions and progressively expanding the role of the private sector, including non-profit

organisations, in health care delivery. However, by providing a clear set of national goals and a framework of incentives both for States and the private sector, the Federal government can provide the momentum for change.

More immediately within its own area of responsibility the Commonwealth can and will restore the dignity and effectiveness of private medical practice, and broaden and rebuild the badly battered private health insurance industry.

3.5 OBJECTIVES FOR FIRST TERM OF OFFICE

Achieving the most effective structure for Australia's health will take time, and goes well beyond the essential reforms in Medicare. It will therefore be put in place over a period of up to five years, with the major legislative changes enacted during our first three years in office.

Supplementary Paper No 3 9

The changes will be made gradually, but with clear objectives in mind, causing the

least possible disruption to consumers, providers and governments. Full consultation will occur at each stage with each level of government, with voluntary agencies and private sector providers. The public will be informed at all times as to the goals being pursued and the benefits to be obtained.

During our first term in office we will aim to achieve five broad objectives:

maintain and improve existing standards of health care delivery for pensioners, war veterans and welfare beneficiaries.

• maintain universal coverage of health care for the whole population, whilst expecting those who can afford it to take some responsibility for their own health costs;

eliminate the starvation of funds to health systems, particularly the hospitals, by achieving a better mix of private and public funding and service delivery;

in co-operation with the States, carry out a major program of structural reform of health delivery systems, particularly hospitals, through better incentives, improved management practices, contracting out and implementation of our industrial relations reforms;

establish the financial and legislative framework for the States to take over the responsibility for the delivery of health services once the structural reform measures are firmly in place;

3.6 SPECIFIC POLICY MEASURES AFFECTING INDIVIDUALS AND FAMILIES

In its reform of Medicare, the Coalition is committed to the following policy measures directly affecting individuals and families:

universal health cover for the whole population;

no reduction whatever in the services currently provided to pensioners and welfare beneficiaries. Indeed their situation will be improved significantly;

no reduction in services or benefits for war veterans and their dependants;

strengthening the role of private health insurance and increasing competition between health insurers;

maintenance of community rating for private insurance;

10 Supplementary Paper No 3

tax credits to those on low

, incomes who take out, private health insurance,

with additional credits for the elderly;

surcharge on, higher income earx ers who do not take out private health insurance;

expansion : of private insurance , options;.. , ..

improvements to the system of reinsurance;

abolition ,of the :government monopoly on medical -insurance, and provision of gap insurance for medical bills;:

,allowing, pharmacies to act as agents for Medicare;.. _ ..

abolition of bulk billing, except for veterans, war widows, pensioners, health care card holders and the disabled;

• retention of current rebate levels for pensioners/cardholders. .(85 per cent) and in-patient services (75 per cent); reduction of general rebates from 85 per cent to 75 per cent;

• extension of Pharmaceutical Benefits Concession (PBC) card to retirees.

Each of these commitments is now, explained in more detail.

3.6.1 Universal Coverage

The Liberal and National Parties will ensure that no individual in Australia is left without health cover. The situation in other countries, such as the United States, where 35-40 million people have no health cover, is completely unacceptable. A taxation based system is the most efficient way of ensuring that all individuals are covered. In countries where universal coverage is not available it is often the most

vulnerable - the elderly, those with chronic illnesses and the very young- who are exposed to sickness and disease.

The ability to opt out of the public system into the private system, with many receiving assistance to do so, will correct the imbalance between the public and private spheres which has occurred since the introduction of Medicare, while maintaining universal coverage.

Supplementary Paper, No, 3 11_

3.6.2 Pensioners and Welfare Beneficiaries

Under a system of universal coverage it is essential first to reassure those least able to provide for themselves that not only will they continue to be secure under a Liberal-National government, but that their situation will be improved. The Coalition will maintain all existing benefits for pensioners and health care card holders. They will continue to have free access to medical services and hospital

services, and will continue to receive pharmaceutical concessions.

Further, as a result of the changes to private health insurance in this policy, they will be less likely to have their places in hospitals taken by those who can afford to pay, as happens currently under Medicare. Also, as described later, pensioners and others on low incomes will be heavily subsidised if they take out private insurance. Age pensioners and retirees with incomes less than $12,000 per annum

(single) and $14,500 per annum (married) will receive credits equivalent to the cost of private health insurance.

3.6.3 War Veterans

There will be no reductions in health benefits or services to war veterans, war widows and their dependants.

3.6.4 Strengthening the Role of Private Health Insurance

Medicare in its present form has so discouraged people from taking out private health insurance that it has led to the absurdity of a choked public hospital system working side by side with a grossly underutilised private system.

Increasing numbers of public patients are overwhelming the supply of beds in the public hospital system leading to a lengthening of queues, while falling private demand is leaving private hospitals underutilised. While more than 60,000 people languish on waiting lists for public beds for elective surgery around Australia, private hospitals have average bed occupancy rates of only 55-60 per cent.

The proportion of the population with private health insurance has fallen from 67 per cent in 1982 to 44 per cent in 1991.

The result is that the public hospital system is overburdened by demand and short of funds, desperately spending its few dollars on running costs whilst the standard of buildings and equipment markedly deteriorates.

On the other hand, the private hospital system is of a much higher standard and greater capacity than ten years ago and is ready to accept its load of patients who can afford to provide health cover for themselves. It finds it difficult to attract patients, however, because it appears too expensive in comparison with the

apparently free Medicare system.

12 Supplementary Paper No 3

Over $400 million has been withdrawn by the Labor government from the private

health system by such measures as the removal of the bed day subsidy and withdrawal from the reinsurance pool.

Pressures on both public and private systems will intensify as the population ages, unless changes are made.

Incentives need to be given to individuals and families to take out private health insurance and thus provide for their own health care. Encouraging such a movement into the private health sphere will not only relieve the pressure which is choking the public system but will also increase the utilisation and, therefore the

efficiency of the private system. Both systems will benefit from such a move. The incentives which can be offered include both financial and regulatory ones.

3.6.5 Financial Incentives to Take out Private Insurance

Tax credits will be given' to lower income individuals and families who take out private health insurance as from , 1 July 1994. For those individuals or families who do not pay tax, a system of credits which can be offset against the costs of private health insurance will be "implemented.

The credits will be targeted at lower income earners, with the maximum credit being given to those with incomes of less than $12,000' per annum, and no credit being given to those earning more than $30,000 per annum. Those with incomes of less than $12,000 who take out private health insurance will receive a credit of

$400 for families or $200 for singles. Those with incomes between $12,000 -$20,000 will receive a credit of $300: for families or $150 for singles. Those with incomes of $20,000 - $30,000 per annum will receive credits of $200 for families or $100 for singles.

Additional credits will be made available to those over .65 .years of age. For those with incomes of less than $12,000 per annum (single) and $14,500 per annum (married couple). the total credit will total $800 for families or $400, per single person. This will mean that people over 65 on incomes less than $12,000 (single,)

and $14,500 (married couple) per annum will be able to receive tax credits equal to the cost of private health cover. For incomes between $12,000(single);, $14,500 (married couple) and $20,000 the credit will be $500 per family and $250 per

single person. For incomes between $20,000 and $30,000 the credit will be $400 per family and. $200 per single.

Tables 3.1 and 3.2 illustrate the value of the tax credits. for single people and families:

Supplementary Paper No 3 13

TABLE 3.1

Income Group Credits

(Aged less than 65 years)

Less than $12,000 $200 per single

$400 per family

$12,000-$20,000 $150 per single

$300 per family

$20,000-$30,000 $100 per single

$200 per family

TABLE 3.2

Income Group Credits

(Aged More than 65 years)

Less than $12,000 (single) $400 per single

Less than $14,500 (married) $800 per family

$12,000 - $20,000 (single) $250 per single

$14,500 - $20,000 (married) $500 per family

$20,000 - $30,000 $200 per single

$400 per family

Those with incomes greater than $30,000 will receive no credits.

As the cost of private health cover for a single person is currently around $400 per annum and $800 per annum for a family, these credits will provide substantial financial relief to those wishing to take out private health insurance.

For the aged who are now privately insured the tax credit will provide them with a substantial reduction in their health costs. For those who are not privately insured and on low incomes the $800 tax credit per couple will effectively meet the cost of private health insurance.

3.6.6 Surcharge on Higher Income Earners Without Private Insurance

The present policy of providing 'free' hospital services to those on relatively high incomes without private insurance conflicts with the Coalition objective of encouraging people to accept greater responsibility for their own affairs.

•14 Supplementary Paper No 3

The problem

is that approximately 20-25 per cent of those earning more than $40,000 per annum do not take out private health insurance. Those on higher incomes for whom private health insurance is a viable option but who do not exercise this option may at present prevent pensioners, for example, who may not be able to afford any alternative, from having access to public hospital beds. They

are forced to wait, often for years, in considerable discomfort in hospital queues.

Also, those who have taken out private health insurance understandably resent, the availability of costly public hospital beds free of charge to those on equal or higher incomes without private insurance. They regard this system as grossly unfair.

The Coalition will oblige those on higher incomes either to take out a private health insurance option or pay a special surcharge on the Medicare Levy as from 1 July 1994.

Thus family contributors earning more than $50,000 per annum who choose not to take out private health insurance will be required to pay a surcharge on the Medicare levy of $800 per annum. Similarly, uninsured single contributors earning more than $40,000 per annum will be required to pay a surcharge of $400 per annum. Both charges will be avoided completely by taking out private insurance. Both charges will be tapered in over the preceding $5,000 per annum

of income.

Given the substantial benefits flowing to people on these income levels from the new tax scales in the Coalition tax package, it is only fair that those not already bearing the burden of private health insurance costs should devote part of their reduction in tax to providing for their own health care.

3.6.7 Expansion of Private Insurance Options

A further disincentive to taking out private health insurance has been the awareness that individuals entering private hospitals will usually be faced with significant extra costs as a result of their admission. It is the Coalition's view that all reasonable charges should be able to be covered by private health insurance if an individual so chooses, subject to co-payments being required to minimise overuse and overservicing.

For those taking out private health insurance, full medical cover up to an AMA Schedule level, subject to certain patient co-payments, will be allowed. The AMA Schedule level will be negotiated between the AMA and the health funds. Furthermore insurance options to cover extras such as costs of prostheses and other items will be available at the same cost for those using private hospitals as for those using private beds in public hospitals.

Supplementary Paper No 3 15

Other options such as catastrophe insurance will again become available from the

private funds. Such schemes involve an individual accepting responsibility for the first` portion of any health bill up to a predefined but significant level with full cover' being offered by the health fund for the remainder.

Arrangements where the front end deductible payment is significant mean that health premiums can be reduced to close to half current levels. Such options will obviously be attractive to those prepared to accept the risk of higher outgoings in the event of illness, and in particular to those on higher incomes not currently insured. These options will be allowed at the discretion of the health funds.

We will encourage competition between providers of health insurance and will remove unnecessary bureaucratic constraints on the industry.

The Coalition is confident that the availability of subsidised premiums, more comprehensive cover and more attractive options will encourage significant numbers of individuals to take out private health insurance.

3.6.8 Community Rating

The essence of community rating is that the aged and chronically sick do not pay more for their health insurance cover than the young and the fit. It is effectively a cross subsidisation of the elderly by the young. The contribution rate charged to each individual is independent of the individual risk factors involved and reflects the average experience of the total pool of risks.

Whilst this has obvious advantages it does stifle competition between health funds. The alternative is risk rating - either complete or partial. A risk rated system would certainly increase competition between funds but would result in the elderly paying much more for their health cover than the young. ' This is a

situation which the Liberal and National Parties believe is unacceptable. Risk rating would allow a range of options to be available including no claim discounts, packaging health insurance with other insurance benefits, long term price guarantees, non smoking and other forms of lifestyle discounts and incentives and fractional or top up benefit products. It would certainly allow full competition between funds.

We believe however that the central principles of community rating - that a person should pay the same health insurance premiums regardless of age, sex or state of health are of overriding importance. We will therefore maintain community rating.

16 Supplementary Paper No 3

Nonetheless health funds are hamstrung at present by unnecessary regulation.

We will continue to require observance of appropriate prudential requirements and we will require hospital cover to reach a basic standard, as at present. However we will not define, the details of other tables for hospital cover. We believe that

this should be a matter for the funds, since clearly this will encourage competition between health funds for customers.

3.6.9 Improving the System of Reinsurance

Under community rating, high risk patients such as the elderly and chronically sick are charged the same premium as low risk patients such as the young and fit. There are thus incentives for health funds to recruit younger, fitter patients, and to make it difficult for elderly patients to obtain private health cover..

The reinsurance scheme is a means of compensating those funds with a higher proportion of elderly patients for the extra costs of looking after those patients. The compensation comes from those funds which have a lower number of elderly members and therefore have a lower financial burden per capita.

Whilst we support the principles of the scheme, we acknowledge that it has led to inequities in the distribution of finances between funds.

We support the basic principle of reinsurance but we believe that the formula used for allocation and contribution assessment needs to be reviewed to ensure a fairer distribution of resources between the various parties involved.

The incentives offered by the Coalition will result in higher numbers of aged individuals taking out private health insurance. These individuals will be a higher cost burden (because of their higher usage of hospital beds) on the health funds. We will make a contribution to the reinsurance pool equivalent to the

anticipated excess burden this will impose on the funds.

3.6.10 Abolition of Medical Insurance Monopoly and Provision of "Gap" Insurance

Medical insurance, unlike hospital insurance, is at present a Government monopoly, with no room for competition from the private funds.

At present private health funds are excluded from competing in this market in all but a very small minority of medical cover situations. The Coalition will allow private health funds to compete in this market and encourage other insurers to enter into and offer both medical and hospital insurance. This will create an extra

element of competition, and for those who are privately insured it will allow "one stop shopping" for their health bills. This will be an improvement on the current system where hospital bills may be rebated by a health fund but medical bills are rebated by Medicare offices thus often involving two different trips for rebates.

Supplementary Paper, No 3 17

This in itself will make private health insurance more attractive.

Higher levels of cover will be available from the private funds to at least partially cover the gap between the rebate and any fees charged up to the AMA Schedule. (At present some 70 per cent of non bulk billed fees are charged at levels higher than the Medicare Schedule level).

Patient co-payments are an important part of restraining the overuse of services, and we will therefore require co-payments as part of these medical insurance cover options.

Two medical cover components will be available from the private health funds.

1. The funds will be able to act as agents for Medicare for basic medical cover.

2. The funds will be able to offer additional medical cover up to a higher schedule level which they will negotiate with the Australian Medical Association (AMA). Gap insurance will allow the funds to offer different levels of cover up to the AMA Schedule level, but they will not be allowed to rebate more than 85 per cent of the fees, leaving the patient to pay a co-payment. The maximum co-payment per item will be $30 and the maximum co-payments per annum will be $300 per family.

For in-patients, fees up to the Medicare Schedule Fee will be fully insurable, as at present. Fees charged above this level, up to the AMA Schedule, will be coverable by insurance from the private funds. Again, the

maximum cover allowable will be 85 per cent of the fees charged up to the AMA Schedule level, subject to maximum patient co-payments of $30 per item of $300 per family per year.

Charts 3.3 and 3.4 show what level of cover is available under current Labor policy which includes the $3.50 co-payment and proposed Liberal/National health policy.

18 Supplementary Paper No 3

S

25,

20

15

10

5

0

35

30

25

20

15

10

5

CHART 3.3

LABOR LIB/NP UNINSURED LIB/NP INSURED

O MEDICARE REBATE ® GAP INSURANCE L PATIENT CONTRIBUTION

NON-VOCATIONALLY REGISTED GP

CHART 3.4

PAYING THE DOCTOR

AMA RECOMMENDED FEE CHARGED S

LABOR LIB/NP UNINSURED LIB/NP INSURED

MEDICARE REBATE ® GAP INSURANCE PATIENT CONTRIBUTION

NON VOCATIONALLY REGISTERED GP

Supplementary Paper, No 3 19

Allowing more comprehensive medical insurance cover will be a further attraction

for Australians to take out private medical cover and its associated private hospital cover.

There are a number of anomalies in the Medicare Schedule Book which will be reviewed. The Liberal and National parties will institute a comprehensive and continuing review of the Medicare Schedule by a committee including representatives of, amongst others, the medical profession, the health funds and the private hospital industry.

The terms of reference for this review will include a direction to encourage the practice of preventative medicine and the use of appropriate screening procedures which are, in the long term, cost effective.

3.6.11 Retail Pharmacies as Medicare Agents

Access to payment of Medicare benefits must be improved, particularly in isolated areas.

Access to Medicare offices has been reduced recently by the Labor Government which has closed at least 13 Medicare offices. Many have been in country areas and their closure has resulted in claimants having to travel long distances to receive their Medicare rebates in person. The only alternative has been to claim by mail and wait, often for many weeks, for the rebate to be paid.

The Coalition will allow retail pharmacies to act as agents for Medicare. Most pharmacies will soon have a dedicated telephone line to the Health Insurance Commission, and access will be relatively straightforward. This will significantly improve access to Medicare, particularly for those living in isolated areas.

3.6.12 Bulk Billing

Patient overusage and doctor overservicing both divert resources away from areas of need. They must be minimised without adversely affecting the quality or availability of health care offered.

Most health professionals agree that overservicing is widespread.

Part of overservicing is due to the increasing practice of defensive medicine, brought about by the high risks of litigation. A great deal of overservicing however has been the result of the availability of bulk billing and the perception that visits to the doctor are 'free'. The government's recent changes to the bulk billing system do little to alter these perceptions.

20 Supplementary Paper No 3

Since bulk billing was instituted. in 1984

. the number of Medicare items I rebated

(doctors' consultations, operations, pathology tests etc) has increased from 110 million items in 1984 to 146 million items in 1989, at a time when there has been no significant change in either the size of the population, the. age of the population or the structure of the Medicare schedule.

In spite of this increase in Medicare items rebated, there has been no significant overall improvement in the health of the nation. Indeed bulk billing, as was predicted at the time of the introduction of Medicare in 1984, has lead , to a deterioration in medical practice, particularly general practice. Pressures on general practitioners' incomes lead inexorably to shorter ; and less thorough

consultations, often accompanied by unnecessary referrals to specialists. , ' The overall cost rises while the incomes of conscientious general practitioners decline. There is no doubt that bulk billing has lead to a decline in professional standards in much of Australian medical practice..

There can be no compromise in the standards of medical practice, which in Australia have been among the highest in the world. Judicious and moderate I use of good quality services accompanied by an appropriate level of remuneration for

doctors are essential ingredients in the reform of Medicare.

Overseas evidence indicates that co-payments in the order of 20-25 per cent result in the reduction of unnecessary services by up to 25 per cent. Most importantly there is no deterioration in the quality of service offered or in the health of the population.

Labor's Budget decision to introduce a $3.50 co-payment on all medical services was a belated recognition of the need to introduce price signals into the health system, otherwise Labor's so called free and universal health care system would collapse. As the Minister for Health, Mr Brian Howe conceded in June this year:

"Medicare is unsustainable unless we are prepared to take corrective action in certain areas."

The principle of a price signal via a co-payment was strongly supported by the Coalition. Despite this, the Labour Government was unable to deliver on the proposal and was obliged to water down its Budget announcement to a smaller co-payment of $2.50 per doctor visit.

The diluted proposal will, in fact, encourage increased levels of bulkbilling which in turn will minimise the effect of co-payments on restraining overusage and overservicing.

The Coalition will, therefore, address the main source of overusage by retaining bulk billing only for pensioners, health care card holders, the disabled, veterans and war widows.

Supplementary Paper No 3 21

Bulk billing will not be available for the remainder of the population.

Doctors will of course remain free to accept the . Medicare rebate cheque in full payment of their account in specially deserving cases, bearing in mind that more than four million pensioners and health care card holders are already covered under unaltered bulk billing arrangements, and will remain so.

3.6.13 Rebate Levels

Rebates for bulk billed patient services to pensioners and health care card holders will remain at 85 per cent of the Medicare Schedule Fee. Rebates for other non-inpatient services will be reduced from 85 per cent to 75 per cent of the Medicare Schedule Fee. Pathology rebates will remain at 70 per cent of the Schedule Fee.

Rebates for inpatient services will remain at 75 per cent.

As previously stated, additional insurance options will be available from private funds at an extra cost to cover a significant percentage of the gap between the rebate and the fee charged to the patient.

3.6.14 Extension of Pharmaceutical Benefits Concession Card to Retirees

The Coalition is concerned about the inequities created by present arrangements which deny some pensioners and retirees access to various concessions, especially those who have made provision for the bulk or all of their own retirement income.

This is particularly so in the area of health care. To reward self help and private provision, the Coalition will extend the Pharmaceutical Benefits Concession (PBC) card to the half million people aged 65 years and over who are currently not in

receipt of any government concessions and whose income is less than $40,000 (single) and $50,000 (married) per annum. The PBCC will be available from 1'July 1993.

3.6.15 Medicare Levy

The Labor government has tried to maintain the fiction that by paying the Medicare Levy taxpayers have made adequate provision for their health care. The objective has been to portray Medicare as an inexpensive health system.

'The claim is fraudulent, as the Levy pays for only one eighth of Commonwealth, State and local government health expenditures. In effect it is simply part of the taxation system, and the Coalition will regard it as such. It will remain at 1.25 per cent of taxable income, and will not be increased.

22 Supplementary. Paper No 3

3.7 SPECIFIC MEASURES AFFECTING THE HEALTH CARE :DEL NERY

SYSTEM

The preceding measures directly affect the users of the health care system in their daily lives. They will go a very long way towards improving the fairness, viability and standard of service of the system. In addition to these measures, however, there are other structural problems that must be tackled before further. improvements in service can be made. These include:

reform of the public hospital systems;

control of doctor numbers;

supply of pharmaceuticals.

Each of these issues is dealt with in turn.

3.7.1 Reform of the Public Hospital Systems

The delivery of health care, particularly in public hospitals, must be improved to prevent wastage of resources and obtain maximum value for the health dollar.

Health care delivery, which is primarily under the control of the State (and Territory) Governments, must be a target area for micro-economic reform. Hospital costs represent some 44 per cent of total health expenditure and therefore the efficiency of the hospital system has a major impact on health costs. The style and effectiveness of hospital management also has a profound effect on the quality of patient care and the quality of life of those who work in the system.

Divided responsibilities between Federal and State Governments, and shortcomings of public sector management have produced public hospital systems in which wastage due to inefficiencies is very high. Most public hospitals still do. not have costing systems that have been commonplace in large scale private sector enterprises for decades.

For example, it is rare for a public hospital to know what the cost of running a particular ward is against a budget, and few hospitals can tell how much it has cost to treat a particular patient. Despite the existence for many decades of cost accounting systems that could provide such information, our public hospitals are only just now beginning to install such systems.

Supplementary Paper No 3 23-

Industrial relations practices further impede

efficient hospital management. In

common with most large scale unionised enterprises in Australia,' hospitals are riddled with restrictive work practices which add layers of unnecessary additional cost. Union pressures, coupled with politically constrained and sometimes weak management have severely restricted the contracting out of services such as

catering, laundry, cleaning, porterage and maintenance. In these areas substantial savings are possible without a loss of service quality.

If cost reduction programs in other industries are taken as a guide (and there is no reason to believe that hospitals would be different) at least 15 to 20 per cent of existing hospital running costs could be saved without any deterioration in standards. Indeed, the kind of changes proposed would lead to improved staff morale and a likely improvement in service standards.

Moving outside the walls of the hospitals themselves, there are further opportunities for reform and increased efficiency in managing the whole range of areas of service delivery. Better use of private hospitals has already been referred to. Also there are overlapping responsibilities in the provision of long term care between state hospitals and nursing homes. Other areas of overlapping Federal-

State functions include divided responsibilities for the provision of pharmaceuticals and the use by State hospitals of Medicare medical 'benefits to run outpatient departments and to purchase items of capital equipment.

No system of health care financing and provision will work unless these deep seated problems are tackled energetically. In the medium to long term the States will need ` to assume managerial and funding responsibility for the full spectrum of health care delivery. This will involve the abolition of Federal-State hospital agreements.

Our task in our first term will be to provide the States with incentives to carry out the necessary program of reform in their hospitals and other health care delivery systems. We will therefore negotiate new agreements with States under which they will be asked to:

bring organisation structures, accounting systems and management information systems in their hospitals up to best international practice;

establish service purchasing units separate from the running units and install systems of financial incentives for efficiency in the operating units, such as case-mix reimbursement; (Under casemix reimbursement schemes hospitals receive payment for each disease event rather than on a per diem basis. Thus payments are made for what hospitals do rather than how long

they take to do it, providing incentives for efficiency. The implementation of casemix reimbursement will make it easier for public hospitals to negotiate with private hospitals to take over some of the care of Medicare patients, thus further reducing waiting lists.)

24 Supplementary Paper No 3

make effective use of resources across both the

public and private sectors;

• contract out services such as catering, laundry, cleaning, porterage and maintenance to private enterprise; and

negotiate productivity based employment contracts with professionals and operational staff under our industrial relations policy.

These reforms are essential if we are to make use of the best available health care. resources, while at the same time improving immeasurably the quality of care, and of no less importance, the job satisfaction, professionalism and working conditions of those who work in the system.

3.7.2 Control of Doctor Numbers

There is concern over the growth in doctor numbers in Australia relative to the population.

If medical schools and medical services were not heavily subsidised, the government would have no cause to concern itself with doctor numbers. However, the existence of such subsidies produces a link between the number of doctors practising and the level of health costs.

Facing these realities, the Coalition will (as the sole exception to its policy of deregulation of university places) maintain controls over the number of places in medical schools. It will also monitor the controls on the immigration of doctors and require that foreign medical graduates already in Australia meet the same clinical and theoretical standards as Australian graduates.

One major problem is not overall doctor numbers but the distribution of the doctors. There are too many doctors in most major towns and too few in isolated areas.

Incentives need to be given to doctors to practice in isolated areas. Encouragement will be given to institutions to provide programs which enrol more medical students from isolated areas, to ensure that part of medical student training is spent in isolated areas, and that the medical curriculum includes an understanding of the special problems facing isolated doctors. Arrangements to facilitate locum arrangements for isolated doctors will be discussed with the

States.

We will also discuss with the medical profession the possibility of whether financial incentives, such as differential Medicare rebates,. can be offered to isolated practitioners.

Supplementary Paper No 3 25

3.7.3 Supply•of Pharmaceuticals

The majo r problem in regard to the supply of pharmaceuticals in Australia is the inappropriate bureaucratic restraints placed upon the availability of new drugs. Because of this, many Australians are often denied access to the best and most effective therapies.

Professor Peter Baume's report "A Question of Balance: Report on the Future of Drug Evaluation in'Australia", offered sensible solutions to these issues. The Coalition will ensure that Professor Baume's recommendations are implemented as a matter of urgency.

A Liberal National Party Government will maintain the Pharmaceutical Benefit Scheme (PBS) and endorse its underlying principles of subsidising patients' expenses associated with the delivery of the most effective and modern therapeutic goods and services.

In the operation of the PBS a Liberal/National Party Government will regard itself as being in genuine partnership with community pharmacists.

Full recognition will be given to the professional skills which make community pharmacists uniquely qualified to serve as the primary outlet for dispensing the necessary service, advice and counselling that goes hand in hand with modern pharmacy practice.

3.8 PUBLIC HEALTH MEASURES

Concentration on the grave deficiencies of Medicare and the health delivery system must not divert attention from policy issues that in the longer term will have a much greater impact on the health of the nation. Ultimately sound positive public

health programs and medical research will shape the health of the nation and determine the scope and scale of health care required in the future.

3.8.1 Public Health

For too ` long national health policy has focussed on processes rather than outcomes. The Coalition will develop, in consultation with the States and appropriate organisations, a set of health goals and targets to focus attention on health issues affecting the whole population.

Public health - the efforts of society to promote, protect, restore and maintain the population's health - should include encouragement to practice preventative measures including lifestyle changes, screening tests, immunisation programs, communicable disease programs and educational programs.

26 Supplementary Paper No 3

The role of the general practitioner in practising preventative medicine has been

downgraded in recent years. We believe it is vital that general practitioners again be encouraged to practice preventative medicine by appropriate restructuring of the Medical Benefits Schedule.

The Coalition believes, that a strong national capacity in the public health area should be maintained, over and above efforts at acommunity or area health level.

AIDS is a major problem. The Coalition will maintain a strong research effort into AIDS and will ensure that as new, effective drugs emerge they are rapidly made available to treat patients with AIDS. We will also continue public education programs aimed both at the prevention of AIDS and public understanding of the

needs of people with AIDS.

3.8.2 Women's Health

The Liberal and National parties recognise the need to improve access to specialist and general health services for all women in Australia.

We recognise that education and information must be available to assist with the choices that will affect the health and well-being of women throughout their lives.

Younger women face the problems of developing self-awareness and confidence. Their focus changes as they assume family responsibilities, in . most cases accompanied by the responsibilities of work outside the home. Achieving a balance between these responsibilities, whilst at the same time attending to their

own physical and mental health needs is difficult.

The concerns of women in their post-menopausal years are unique, as are the needs of the frail and elderly.

Governments can assist in providing educational and informational programs to reach out to these women with their particular needs.

Whilst we support the thrust of encouraging mammographic screening for breast cancers, we believe that the family doctor has often been excluded from this program, often to the detriment of the patients. We will ensure that GP involvement is upgraded.

For the health and well-being of all women in Australia, we acknowledge the importance of preventative health care; nutrition; protection from violence, abuse, degradation; drug and alcohol dependency; and screening for the early detection of breast and cervical cancer.

Supplementary Paper No 3 _:27

Isolation prevents many women from equal access to services for better health.

This includes not only country women, but women who are isolated in their own homes and communities due to disabilities, or cultural or geographical barriers, including Aboriginal and Torres Strait Island women.

Women in isolated areas generally have poor access to mammography. We will fund the provision and staffing of mobile breast cancer screening units to visit rural and remote areas around Australia.

Osteoporosis (bone thinning) is becoming increasingly recognised as a major problem in post menopausal women. Measurement of the bone density (densitometry) is not currently available under Medicare. We will make densitometry available as a Medicare schedule benefit.

To ensure that women in isolated areas have access to densitometry, we will fund the supply of densitometers to be installed in mobile units with the mammogram equipment. The main target group in both cases is very similar - post menopausal women - and neither of these screening options would otherwise be readily available to women in isolated communities. We will allocate $8 million for the

combined mammogram/densitometry mobile units.

In much of rural Australia and all of remote Australia, access to health services is a major issue, particularly for women and children.

Many health services in this area are provided by remote area nurses. This is a specialised area of nursing and there is a great need for training and support for these nurses who work under difficult and trying conditions. At present, such training or support as exists is poorly co-ordinated and organised.

The Coalition will establish a remote area nursing training scheme, which will become the focus for training and support for remote area nurses, at cost of $2 million.

3.8.3 Aboriginal Health

Aboriginal Australians suffer the worst health of any identifiable group in the community.

Low standards of Aboriginal health can be traced to a range of environmental and social problems, including inadequate sanitation and water supply; inadequate housing; unemployment; lack of educational opportunities; poor diet as the result of a decline in the use of traditional foods; alcohol and substance abuse; and family

breakdown and poverty.

28 Supplementary Paper No 3

It is meaningless

to look at Aboriginal health in isolation. We must do so on a broader basis by looking at not only health but housing, infrastructure' provision. and educational and training opportunities. To this end, the Coalition views programs aimed at addressing these problems as high priority.

The Coalition Government will focus on practical and "on the ground" solutions to the problems that Aboriginal people face. Specifically, we will:

support the National Aboriginal Health Strategy, in co-operation with the States and Territories;

maintain support for Aboriginal controlled medical services, so long as they provide services in an equitable and efficient manner;

develop Aboriginal health programs in direct consultation with Aboriginal communities and, wherever possible, involve Aboriginals in the delivery of services;

continue an educative program amongst Aboriginal communities with the goal of containing the spread of AIDS;

in co-operation with the States and the Northern Territory, we will give attention to .research and development of preventative and rehabilitative programs;

support Aboriginal communities in implementing their own controls over drug and alcohol abuse.

in co-operation with the States and Territories and where appropriate to health and health related problems, implement the recommendations of the Royal Commission into Aboriginal Deaths in Custody.

3.8.4 Mental Health

The Burdekin Enquiry into human rights and mental illness highlighted the harsh realities faced by people with mental illness. Yet mental health has not received the attention it deserves from the Federal Government.

The government funded National Better Health Program in 1986 funded 27 programs, only two of which were even vaguely related to mental health..

When we consider the high prevalence of schizophrenia, suicide, anxiety and depression in the community, it is clear that mental health should have a much higher priority than it has historically been allocated. As many as 25 per cent of

Australians suffer from moderate to severe mental disturbances and 30-40 per cent of all hospital beds are taken by people with mental illnesses. Mental health is not a minority issue.

Supplementary Paper No 3 29

Clearly what is required is a national approach to mental health, setting goals and

priorities for mental health and strategies to improve the mental health of all Australians, including co-ordination of mental health services across the States.

A national mental health program must be delivered by the government in collaboration with community organisations. There are many effective self-help groups, support groups, volunteers, families and carers of the mentally ill who carry out invaluable work on a number of mental health problems. They must be involved in this process.

The Coalition will, as a consequence of the great importance it places upon this issue, develop a separate mental health policy to address the many and varied problems in this area.

The Coalition is also concerned about those Australians suffering from dementia. The population is ageing rapidly and, given that the prevalence of dementia increases with age, there is an urgent need to develop a range of innovative, flexible and cost effective programs for the care of dementia sufferers.

In the areas of respite care and home and community care, there must be greater recognition of the dementia-specific problems faced by sufferers and their carers.

The Coalition will provide an additional $10 million to widen the current scope of the respite care program, which will include places for working hours, evening and weekend care. Part of this expenditure will expand current home and community care programs designed to assist families of dementia sufferers.

3.8.5 Medical Research

Australia has an enviable record in the excellence of its bio-medical research. It is a national asset that must be retained.

A Liberal/National government will continue to fund and support Australia's endeavours in medical research.

We recognise that improving our efforts in this regard will be of enormous benefit in terms of health care and health outcomes.

Special emphasis will be given to ensuring that monies allocated to research funding are delivered in the most cost effective manner, administrative expenses are minimal and that researchers are provided with the incentives and encouragement needed to further their work in this country rather than overseas.

30 Supplementary Paper No 3

3.8.6 Increase in Tobacco Excise

The Liberal and National parties will increase the excise on tobacco by 25 per cent.

The medical community is strongly in favour of such action and has been campaigning for it for some time.

Indeed, the Australian Medical Association, in its 1990 pre-Budget submission to EPAC called for an increase in tobacco excise on health grounds stating that:

indirect taxes on tobacco [should] be increased with a view to an increase in prices, at the retail level, of about 40 per cent."

Peak health bodies including the Anti-Cancer Council of Victoria and the National Heart Foundation have endorsed the call for an increase in the excise levied on tobacco as a means of reducing the level of tobacco-related disease in the community.

3.9 THE FUTURE OF HEALTH CARE

Good health is of vital concern to all Australians.. For too long Australia's provision of health services has been stunted by a system that has reduced individual and family responsibility, damaged the professional standing and sense of fulfilment of doctors, nurses and other health workers and threatened the

reputation for excellence of Australia's hospitals.

Changing this system into one more responsive to human needs and less reliant on government is a massive task. As in so many areas of Australian society, it involves fundamental reform at many levels. The challenge is to bring about the changes in a predictable, orderly manner, with minimum disruption, and with clear objectives in mind.

Not all the measures taken can be popular, but if the necessary decisions are not taken now, the results will become progressively worse, leading to greater problems later on. There is no reason why Australia's health prevention and care system cannot be the best in the world. This policy marks out the essential first

steps in that direction.

Supplementary Paper No 3 31

The emphasis will be ' on funding individual people for ' their education and

training, rather than on funding , institutions directly. In this way greater responsiveness to individual requirements can be achieved.

Within this strategy, the Federal government will have a particular role in promoting the national interest in educational and training opportunities and in the proper monitoring and assessment of standards. The Federal Government's task will be to support the active identification and promotion of

best practice, a national market for educational services, set national goals for improvement, and raise issues of truly national importance. The role of government in funding basic research will be fully recognised.

Despite improvements in educational participation over the last decade, Australia still lags well behind other advanced industrial countries. A principal aim will be to ensure that our education and training institutions offer the full

range of courses required by the diverse needs of students, and that opportunities for educational participation continue to be extended up to international levels.

In the decade to the year 2000 there will be an important role for the private provision of education and training at all levels, and a Coalition government will facilitate private initiative and the private contribution of resources. By

encouraging private effort education and training will be more adequately resourced in Australia over this decade. It is principally for this reason that education services are being zero rated for the purposes of the Goods and Services Tax.

Private and public sector provision of education and training services in the international marketplace will also be encouraged.

The States have constitutional authority and, in relation to schools and TAFE, primary administrative responsibility as well. This is fully recognised within the strategy, and there will be a major effort to restore effective consultation and co-operation with the States and the non-government school systems to raise standards and extend opportunity. Effective co-operation will be crucial to achieving the necessary reforms to our education and training systems.

WORLD CLASS SCHOOLS

Schooling of international standard will be achieved by a set of major initiatives to improve the quality of learning of Australian school students. These initiatives will improve skills in language, mathematics, science and technology, and ensure that Australian students have a solid grounding in the

history of their own country and its place in the world.

2 Supplementary Paper No 4

The policies announced in this document aim to lift the status and quality of

teaching and to greatly improve the quality of information about levels of achievement. Parents will be given increased opportunities to choose their children's schooling, both within the government school systems and between government and non-government schools.

The Liberal and National Party Government will work through the Australian Education Council and other forums to achieve reform of the major structural problems facing the teaching profession, as well as for school-based management and parent choice of school.

National Standards

A National Standards Program will provide objective assessment of achievement levels in core areas of English, mathematics, languages, science, history, geography, and of key competences needed for employment success in co- operation with States and non- government schools, while maintaining and promoting curriculum flexibility.

A $5 million a year school level excellence program for Languages Other Than English (LOTE) will be established. Excellence will be defined in program quality terms, curriculum innovation and advanced communication technologies. Funding will be by competitive tender.

Parent Choice

The right of parents to choose their child's school within the government school sector will be enhanced by a $10 million a year "Schools of Choice" program which will support best practice initiatives in the teaching of language, mathematics, science, technology and cultural areas. It will be a condition of funding that schools receiving funding have the right to admit students according to criteria appropriate to the program on application from parents.

Teacher Quality

A $10 million a year "Quality of Teaching" program will promote professional development, particularly in mathematics, science , and technology, and languages.

Australian Excellence in Teaching awards will be provided on an annual basis for outstanding teachers nominated by schools and parents.

Supplementary Paper No 4 3

Assistance for Disadvantaged Students

• A $5 million a year "Literacy Start" program will be established to

identify and support best practice initiatives in early intervention programs to deal with learning difficulties in relation to ` literacy and numeracy.

• The Asset Test for the Assistance for Isolated Children's Scheme will be abolished.

• Gifted children, who have been gravely disadvantaged by neglect, will be helped by a $2 million a year program to enhance professional development opportunities for teachers and support best practice initiatives and research.

Non -Government School Initiatives

• Per capita grants for non-government school pupils will be based on a minimum grant of 20 per cent of the cost of educating a child at a government school. Funding categories will be reduced from twelve to six, with a maximum funding proportion of 52 per cent. This will be phased in from the 1994 school year over three years.

• Capital assistance for infrastructure in non-government schools will be doubled to $162 million a year.

Labor's highly restrictive "New Schools" Policy will be abolished.

Intrusive accountability requirements for non-government schools will be abolished.

TRAINING OF INTERNATIONAL STANDARD

Levels of participation and attainment in training must be raised to international standards. The Liberal and National Parties will promote an open and flexible training market and facilitate better links between schools, training institutions and the workplace, and support for teachers.

In particular, the Coalition is committed to:

Additional Funding

An additional $520 million to support growth in TAFE over the rest of this decade.

4 Supplementary Paper No 4

Raising the Level of Skills

A framework for the nationally consistent and objective assessment of key competencies for workforce participation will be established;

Support will be given to national competency-based training and a national system of training certification;

Improving Administration

• We will end bureaucratic Commonwealth accountability requirements for the TAFE sector and support development of a flexible and open training market, with locally managed and responsive TAFEs and a competitive private training sector;

• National co-operation to lift the profile of career education will be supported;

• Support will be given to approved cross-accreditation between schooling, training and higher education;

WORLD CLASS UNIVERSITIES

The Liberal and National Parties will end Labor's approach of centrally imposed mediocrity and establish a strong student market and independent universities with the freedom to engage in healthy competition and to define

their own educational missions. An additional $228 million will be made available to extend opportunities for young researchers and to enhance links between universities and industry while strengthening basic research.

Greater Freedom for Universities

We will:

terminate the policy of forced amalgamations and permit institutions which wish to dis-amalgamate on educational or efficiency grounds to do so;

restore to universities their freedom to determine the courses they will offer, thus ending the process of bureaucratically approved profiles. In a limited number of cases, such as medicine, where an effective market for graduate services does not exist, some controls will be maintained.

Supplementary Paper No 4 5

free the academic labour market from the rigid and confrontational

•

centralised industrial relations system which has forced administrative centralisation and undermined collegial relations. Principles of institutional bargaining and voluntary employment agreements will be restored to achieve improved conditions for academic staff,

Greater Access to Higher Education

We will:

establish an effective student market for higher education by basing the recurrent funding of universities on a system of national education awards given to students on the basis of merit, and scholarships awarded by institutions themselves;

maintain and extend the Higher Education Contribution Scheme to ensure that equitable fee deferment and loan arrangements for all students are available, and that no student is denied access purely for

financial reasons;

continue to announce the number of student places receiving Commonwealth funding on a triennial basis;

give universities the freedom to offer additional places to Australian undergraduates - beyond the government funded places - on such terms as the universities determine. This will address the problems of unmet demand and overcrowding.

Improving Administration

We will:

Abolish NBEET and establish an independent Higher Education Commission to advise the Government on accreditation of institutions and on institutional funding arrangements;

absorb general capital funding into recurrent funding;

review student financial assistance arrangements to ensure that assistance is available on an equitable basis and that no student with the will and the ability is excluded from university on financial grounds. The particular difficulties faced by rural students will be addressed'.

6 Supplementary Paper No 4

Expanding Research

We will:

• establish a $25 million per annum matching grants program to support basic research in institutions which are successful in obtaining industry research contracts.

• provide 200 additional post-graduate research awards and increase the value of awards by $2,000;

6

SUPPLEMENTARY PAPER NO 4

WORLD CLASS SCHOOLS, UNIVERSITIES & TRAINING

4.1 WORLD CLASS SCHOOLS

Australia is fortunate to have many schools and teachers of excellent quality -both government and non-government. Despite this the levels of attainment of too many Australian students are not only falling further behind the standards of students in other countries, but are too often inadequately equipped for work

or citizenship.

4.1.1 A Strategy for Excellence

An effective strategy to raise the standard of Australian schooling must provide incentives for outstanding teachers, ensure that schools have effective quality leadership, clear goals, an emphasis on achievement and harmonious relations among staff. It must recognise that parents have a vital role in the educational

process, as first teachers, as those who choose their children's school, and as partners in the educational process.

Without seeking to be comprehensive in stating the conditions under which excellence in schooling will be achieved, the following features are of great importance:

there is a high level of independence at the school level for principals and for those to whom they are accountable. Without adequate independence, effective leadership can not be provided, and the ability of the school to adjust to the needs of the local community and its students is inhibited;

teaching is a highly respected profession in the community, so that it attracts as many talented and committed recruits as possible;

goals of the school emphasise achievement and reward for effort, and do not discourage healthy competition which reflects the values of the wider society into which students will be moving;

relations within the school, between principal and teaching staff, between staff, and between staff and students, are relations of mutual respect. Harmonious relations within the school are important for its effective functioning as they are for any organisation;

8 Supplementary Paper No 4

the attainment levels of students are monitored so that individual

• learning difficulties are identified and addressed, and so that areas of weakness can be strengthened. Parents and the community need the, assurance that young people are acquiring knowledge and skills at a

standard that will fit them for life after school;

• parents have the freedom to choose the school their children will attend. This freedom of choice encourages parents to take an interest in their children's education. It also establishes a healthy competitiveness among schools, which in turn produces a diversity among the schools which reflects the diversity of parental and students interests and values. Parental choice encourages schools to provide information about their performance and special features. It also gives parents the ability to register their support for quality teaching, which helps to improve conditions for teachers.

A school system which exhibits these characteristics will also be one which offers the best prospects for providing children who suffer educational disadvantages with an appropriate schooling, for it will provide schooling which seeks to bring the best out of each pupil.

The strategy of the Liberal and National Parties to achieve international standards in Australian schooling therefore leads to policies which:

foster parent choice and school based management;

will provide schools, parents and the community with high quality information about the levels of attainment being reached by students;

invest in the status and quality of teaching;

encourage values of excellence and opportunity;

Our approach is opposed to centralised and bureaucratic regulation of schools and industrial relations. Provided there is adequate objective information about the quality of learning being 'achieved, we strongly support a high level of independence for providers to respond to an informed parent market. Our policies will encourage the provision of this information, the development of such a market, and school based management.

While school education is the primary responsibility of the States, we believe that the Federal Government has a responsibility to ensure that national interests are properly defined and protected, and to secure equal educational opportunity around Australia.

We propose the active use of Commonwealth programs to encourage the reform of school systems towards these objectives.

Supplementary Paper No 4 9

4.1.2

Labor's Failure

Labor has failed to devise an appropriate strategy to secure access for Australian students to world class schooling. Its approach has been centralist and bureaucratic. It has failed to address any of the significant structural issues damaging Australian schooling. In particular it has:

attempted to impose increased bureaucratic controls over schools, both government and non-government, through its intrusive accountability requirements and its obvious movement towards an imposed national curriculum,

tightened the grip of the centralised industrial relations system which has been destructive in its effects on the status ` of teaching, the role of principals and the management of schools;

shut parents out of an effective role in the government school systems;

imposed decisions increasingly through the Australian Education Council with inadequate consultation of non-government schools, school systems and parents;

further restricted parent choice of schools through its "new schools" policy and its failure to lower the financial hurdles in the way of parent choice;

failed to provide the community with satisfactory and objective measures of the standards of attainment of students, for fear of treading on the toes of its bureaucratic and union mates;

poorly targeted assistance to educationally disadvantaged students and deliberately neglected the severe " problems of rural educational disadvantage.

In responding to Coalition criticism, Labor has concentrated on symbolic measures which will have little or no positive impact on the quality of Australian schooling, such as the so-called "Effective Schools" program and the

Project on the Quality of Teaching and Learning. These are poor substitutes for giving the community the information it is entitled to have, the schools the flexibility they need to do their job, the teachers the professional independence they require, and the parents the effective right to choose their child's school.

4.1.3 National Standards Program

Raising standards is the central objective . of the education policies of the Liberal and National Parties.

10 Supplementary Paper No 4

A central element in this strategy must be high quality objective information

about the standards actually being achieved by Australian students. Not all the outcomes of schooling can be effectively measured, but students, parents and the community are entitled to accurate quality information about the standards of literacy, numeracy, and other basic skills, and of basic scientific and cultural knowledge being acquired.

The principal educational argument against objective testing has been that teachers will teach to the tests and the educational quality of the curriculum will decline, as everything not tested will be excluded. This argument has wide acceptance in Australia at the present time, but is not valid.

Good quality information about the standards being reached in Australian schools is essential to assist parents to make wise educational decisions, to help governments properly target educational resources, to improve standards and to restore confidence to the community that the large resources it makes available for schooling are well spent. Most importantly, good quality information is vital to students themselves so that learning difficulties can be identified and properly addressed and so that progress can be recognised and acknowledged.

Without systematic monitoring of the attainments of students, it is impossible to determine whether changes and reforms to teaching or school organisation are effective and whether the large increases in expenditure on schooling which have occurred are well spent. Above all, it is impossible to determine whether Australian students are keeping up with, or slipping behind, the students of

other nations.

It has been conservatively estimated that over a million Australians, many young and mostly from English speaking backgrounds, do not have adequate literacy skills to function effectively in Australian society or the Australian workforce.

Students receive too little and unsatisfactory information about careers and the curriculum often gives too little attention to the realities of the workplace and the competitive world into which students will be moving.

The most recent international comparison of the level of science achievement of Australian students found that while standards had been maintained since 1970, Australia had slipped well down the international ranking. "Most of the countries with lower scores were developing countries". (ACER).

Supplementary Paper No 4 11

Information about standards being reached is unacceptably

poor. Too little

effort is being made to monitor the standards of attainment in basic skills, key competencies or essential disciplines such as English, mathematics, languages, history or geography. There is widespread concern over the effectiveness of fashionable teaching methods. In the absence of objective information about the quality of learning, public confidence in schooling is eroded, and governments are unable to effectively target resources to areas of greatest need.

4.1.4 Recognition of the Need for Monitoring

After a long period of active resistance to monitoring of standards of attainment in schools, there is increasing recognition of the need to provide systematic and continuing assessment of the quality of learning of students among key opinion leaders. Despite this, there remains considerable resistance among teacher

unions, education professionals, and some State systems to effective assessment. A recent report by the Australian Council for Educational Research on The Scientific Literacy of Australian Students concluded that:

"The results presented in this report have raised sufficient issues of concern about the coverage of science curriculum, activities during science lessons and achievement in science to justify an on-going process of monitoring the quality of science education in Australia. The primary purpose of this monitoring would be to provide further evidence to support

the energetic efforts needed to make continuous improvements to science education in Australia". (pp 195-6)

The National Standards Program will be developed in close co-operation with the States and non-Government School systems.

12 Supplementary Paper No 4

The Coalition's National Standards Program will:

monitor levels of attainment in core skills, including written communication skills, basic literacy and numeracy skills, skills of reasoning and general knowledge as well as attainment levels in science, languages and cultural knowledge;

provide objective information which will allow comparison of achievement levels over time for individual students, for schools, regions, and for Australia as a whole in comparison with other countries;

provide a more satisfactory basis for identifying and addressing genuine problem areas, as well as areas of particular achievement;

replace Labor's attempt to establish detailed regulation of curriculum and school organisation;

enable adequate reporting to parents of the progress of each individual pupil, and provide more information to parents to help them to exercise the choice that the education reforms will give them.

The serious decline in shills in languages other than English will be addressed by a carefully targeted program embracing a number of aspects.

Among these, a $5 million per annum school level excellence program in Languages Other Than English (LOTE) will be established. Funding for schools will be by competitive tender, and recipients will be individual schools, not systems or

organisations. Quality will be defined in terms of program quality, curriculum innovation and the use of advanced communication technologies. State/territory distributions will be

decided in advance and will be based on enrolment share.

4.1.5 Quality of Teaching

High quality of teaching is essential to a high quality of learning.

"Quality education is simply not possible without a cadre of well: prepared and competent teachers at all levels up through post-graduate work ... In Japan and Korea ... teaching at all levels is prestigious, and faculty positions are staffed by outstanding people. The same; was true of

Germany through the 1970s, but the prestige of teachers up through secondary school has fallen in the 1980s". (M. Porter, The Competitive Advantage of Nations)

Supplementary Paper. No 4 13

The deficiencies in the quality of learning of many Australian students will not

be effectively addressed without much greater attention to raising the status and the quality of teaching. Nations which do not treat teaching as a high status profession and attract through adequate rewards a large number of outstanding people ` into teaching will never be able to ensure the highest

quality of learning.

There has been a serious decline in the status of teaching in Australia, reflected in the relatively low tertiary entrance scores of students undertaking education qualifications and the exodus from teaching of many of the best and brightest teachers, demoralised by endless public criticism, interference,

absence of rewards for outstanding performance, paperwork and industrial disputes.

Teachers have been increasingly asked to carry the burden of social and family breakdown, expressed in serious behavioural problems in the classroom.

In devising an appropriate solution, it is essential to recognise that teaching as a profession suffers from serious structural problems.

The centralised industrial relations arrangements have failed to provide suitable employment conditions for teachers and have eroded the authority of principals and the quality of the school environment. The system relies on industrial muscle and confrontation. Frequent strikes have undermined community respect for teaching.

Teaching staff sell their labour in a buyer's market dominated by substantially monopolistic employers. With some limited exceptions, schools have little independence in the hiring of teachers and the

determination of conditions of employment. Teachers cannot move freely between the government and the non-government sectors. They are locked in by regulations and industrial awards. It is not surprising that in such a weak competitive position teachers' conditions have declined.

Parents, who are potentially the teachers' strongest allies, have been shut out of the government schools by the dominant role of the bureaucracy and the unions. The limited capacity of parents in the government school sector to choose their child's school, and the limited

independence of the schools themselves, means that a powerful voice supporting good conditions for teachers and quality teaching is removed.

The pathways into teaching through Diploma and Bachelor courses exclude from the classroom many skilled and experienced people who are not prepared to undertake such courses but who might be excellent teachers if given an alternative route into the classroom.

14 Supplementary Paper No 4

Correcting these structural problems is essential to building a sound basis for

the professional independence of teachers and improving the status of teaching in the community.

In addition to the structural issues noted above, the attractiveness of teaching as a career is further reduced by the limited opportunities for professional development, through which existing teachers can upgrade their knowledge and skills. Professional development has become important in many subject areas, particularly mathematics, science, technology and languages;

While the States retain primary responsibility for the conditions under which teachers work, there are a number of aspects of Federal policy which can significantly contribute to improving the status and conditions of teaching in Australia.

Measures to Raise the Quality of Teaching

1. The Liberal and National Parties will undertake a sustained effort to lift public estimation of teaching as a profession. Political leadership can contribute to this by the way in which it talks about teaching and teachers on the public platform. While stressing the importance of lifting the quality of learning and improving the quality of teaching, teachers need public understanding of the very great pressures under which they

are working at the present time in Australia, with developments in curriculum, technology, and as the schools are called upon increasingly to handle growing social problems.

2. Freeing up the labour market for teachers is an essential step to providing proper professional independence for teachers. Freedom in the labour market goes hand in hand with devolution of decision-making on staffing matters towards the school. The aim of this reform is to create a competitive market for teacher services. A competitive market would tend to reward quality and create the conditions for teacher professionalism.

Supplementary Paper No _4 15

The Liberal and National Parties will use the Australian Education Council

to promote:

freedom of movement between the non-government and government schools and school systems;

mutual recognition of teacher qualifications from State to State;

greater flexibility for schools in the hiring (and dismissal) of teachers and in determining conditions of employment;

acceptance of alternative paths into teaching so that competent persons can be attracted into teaching mid-career;

breaking down regulations and work-practices which inhibit schools in making the most effective use of the skills in the community and in making contacts with industry.

3. Complementing the freeing up of the labour market, the Liberal and National Parties will work to strengthen the parent market by policies to encourage parent choice of school within the government school sectors. Parents are the natural allies of good teachers. Parents want the best teaching for their children. The centralised industrial relations system has worked to exclude parents from any constructive role. In a freer

choice-based system of schooling, parents will be seeking schools which have attracted good staff, and will support the efforts of their child's school in attracting good staff.

The Federal government can encourage the strengthening of the parent market by promoting programs which facilitate diversity within the government school systems and encouraging the states to undertake developments strengthening parent choice.

The "Schools of Choice" program detailed below will have this effect.

4. School leavers of high academic ability will be encouraged to enter teaching by the provision of scholarships to top achievers in tertiary teacher education courses. This policy is a part of the Higher Education Policy and applies across tertiary education. However it can be expected to have particularly beneficial results in areas such as teaching, science

and engineering which have experienced difficulty in attracting their 'share' of the most capable school leavers. The policy will encourage students of greater ability to give consideration to those fields of study in which they will be most likely to attract scholarship support.

0

16 Supplementary Paper No 4

5.

Tertiary institutions will be given freedom to - offer undergraduate as well as post-graduate professional development opportunities for fees. At present the prohibition on tertiary institutions offering undergraduate places to Australian students for fees (over and above those places funded by government) is constricting opportunities for teachers to undertake professional development through undergraduate courses. . Present regulations exclude many current teachers who would be willing

to pay for the opportunity to study at the undergraduate level.

6. A special program will be undertaken to promote Australian 'best practice' in professional development initiatives. There are already examples of excellent professional development programs available. Unfortunately they tend to have limited access, and to be confined to particular regions. These programs could have much, wider, impact in a shorter period of time if they were given short term funding support.

Under a $10 million per annum Quality of . Teaching , Program, Government and private agencies will be invited to tender for the development and production of professional development materials and for professional development programs. There is a particular call for such an initiative in areas where significant changes have occurred, such as in technology, mathematics and science teaching.

7. Australian "Excellence Awards" for outstanding achievements in teaching will be established. These awards will be given on the basis of competitive nomination by schools or parents. They signify the commitment of the Coalition to quality in teaching.

8. Industry Associations will be encouraged to provide, through their members, opportunities for teachers to undertake periods of employment outside the school to broaden their experience of the workplace. The Commonwealth's role here would be essentially one of facilitating the flow of information about successful schemes among industry associations.

4.1.6 Curriculum

Curriculum should be of high standard and based on the best available advice of experts in subject areas. Concerns have been expressed that recent efforts at developing national curriculum frameworks have not aimed sufficiently high standards and will lead to a reduction in the levels of attainment of . students and that the growing monopolisation of curriculum is not in the interests of achieving international standards.

Supplementary Paper No 4 17

The interest of government is not in the precise content of the curriculum

which is taught, but in the standards which are reached in core areas and key skills, and in the identification of problems in the acquisition of basic skills.

The Liberal and National Party government will support the completion of the review process for the national curriculum frameworks and profiles and ensure that this review draws fully on expert professional advice. Curriculum development teams should include a proper mix of professional experts, experienced teachers, education specialists and industry and other interested parties.

The Curriculum Corporation will be reviewed.

In schools and school systems where management is devolved to the school level and where there is adequate monitoring and assessment of standards, there will be increased scope for privatised curriculum developed by independent 'organisations.

The Liberal and National party government will support the development of guidelines for a variety of quality courses suitable to the different abilities, interests and aspirations of the various kinds of students. There should be strong emphasis on the mastery of certain key areas such as English,

mathematics and foreign languages. The guidelines will be developed in close collaboration with business and industry groups.

The Coalition government will encourage developments towards curriculum flexibility at the school level, within broadly defined core curriculum frameworks determined by the States for government school systems.

An excessive concern with curriculum uniformity can be damaging to educational quality. Curriculum must be appropriate to the needs of the students attending the school. The strategy of emphasising effective monitoring of outcomes is much less intrusive than dictating the details of curriculum.

Labor's attempt to move towards an imposed national curriculum is incompatible with the diversity and choice on which educational quality and opportunity depend.

4.1.7 Educational Opportunity

Access to quality schooling for all children must be a key objective of educational policy. At the present time, despite rising participation rates, there remain serious inequalities.

18 Supplementary Paper No 4

Rural and isolated students still face major obstacles in gaining access to

schooling, training and higher education. Rural and remote Australians . are significantly less likely to complete Year 12 than urban Australians, and even less likely to go on to higher education. The cost of living away from home is perhaps the single most important of these obstacles. Many rural students are being excluded from AUSTUDY and AIC support by inappropriate and unfair asset test provisions which do not recognise the collapse of rural incomes.

The targeting of Commonwealth programs to reduce ' educational' disadvantage is often unsatisfactory. For example, the targeting of English as a Second Language (ESL) funding is much less satisfactory than it could be in the absence of objective measures of language proficiency. Assistance to disadvantaged schools is based on locality characteristics rather than student characteristics.

Labor's failure to provide adequate opportunities for parental choice in government school systems locks many students from poor socio-economic backgrounds into schools where the educational problems arising from such backgrounds are concentrated and magnified. Centralised bureaucratic "solutions" have failed. Resistance to objective information°

about learning outcomes prevents the satisfactory targeting of resources.

Labor's antagonism to non-government schools has led to a continuing decline in the resourcing of non-government schools, particularly in relation to capital funding. The exercise of choice of school by low income parents is becoming impossible for many.

Gifted and talented children are today a disadvantaged group. It is simply not true that gifted children will be high achievers without special recognition. Many gifted children fail to achieve their potential and even drop out. Gifted students are not only entitled as individuals to realise their potential, but they have a great contribution to make to the quality of lives of their fellow citizens. Helping the gifted need not be at the expense of other disadvantaged students. Labor's dislike of

encouraging achievement and excellence has encouraged serious neglect of these students.

It is a matter of basic human rights and dignity that all people with the capacity to benefit from education should be able to do so to the limits of their abilities. It is also important to Australia's economic future that all have equal access to education and training opportunities.

Educational opportunity can only be secured by schooling which is diverse enough to meet the variety of student needs and parental values. The strategy announced in the previous sections will greatly enhance educational opportunity and equity in Australia.

Supplementary Paper No 4 19.

Parent choice in the government school sector will provide government school

families from disadvantaged areas with the opportunity , and the . means to seek out the best school for their child and to break the cycle of disadvantage. It will also provide 'schools with greater incentives to respond to the particular needs of the local community.

The taxation reforms announced separately will also greatly strengthen the financial capacity of families to exercise educational choice. Income tax will be reduced for all families, and educational services will not be subject to the Goods and Services tax.

In addition, specific purpose supplementary programs to ensure educational opportunity and access are an important part of the overall Liberal and National Party strategy for education and training. The Federal government is seen as having special responsibility to ensure educational opportunity.

Such programs include student financial assistance through living allowances, and special programs for students disadvantaged by learning difficulties, lack of mastery of English, severe physical disabilities, isolation and other factors.

The Liberal and National Party government will maintain and enhance the effectiveness of special purpose programs to expand educational opportunity according the following principles:

To the maximum extent, possible States and non-government school systems will be provided with program funds to distribute according to their own priorities subject to proper accountability for the use of funds.

Independent schools will receive direct Commonwealth assistance.

Assistance will be provided where possible according to individual student needs on a per capita basis.

The targeting of assistance will be improved so that funds are directed much more accurately to those who need them. More stringent measures will be taken to reduce fraud and abuse.

20 Supplementary Paper No 4

The Liberal and National Party government will

abolish the asset test on the means tested portion of the Assistance for Isolated Childrens Allowance, and raise the level of the non-means tested boarding allowance to $2,400;

provide enhanced assistance to improve educational access for rural students to tertiary education and training;

thoroughly review AUSTUDY to ensure that student financial assistance is available on an equitable basis for all. The targeting of student financial assistance based on grants will be improved to ensure that grants are not made to those who are not in financial

need;

ensure that there is a realistic hardship provision for financial' assistance grants for students in extreme circumstances. The Liberal and National Parties support the application under AUSTUDY of the income test only for students and families in extreme economic circumstances;

pay student financial assistance grants for secondary students directly to parents, in recognition that these payments are not intended to disrupt the integrity of the family in which students are dependents; and in recognition that it is the parents in financial difficulty who require the assistance to enable them to continue to provide for their children's education;

ensure that funding for English as a Second Language is directed on the basis of assessment of students' actual language proficiency;

establish a $2 million per annum program to support professional development for teachers, research and 'best practice' initiatives for gifted children.

In addition, a $5 million 'Literacy Start" program will be established to provide funds for individual schools which demonstrate 'best practice" programs to address literacy problems in early intervention and professional development.

4.1.8 Parent Choice

The Liberal and National Parties have long supported as a fundamental principle the right of parents to choose to send their child to a school which reflects their values. This principle embraces the right of parents to educate their children at home (provided reasonable conditions are met).

Supplementary Paper No 4 21

Parent choice in schooling is increasingly recognised not only as a basic human

right, but as essential to implement an effective parent market in education. A strong parent market is essential to provide, parents with genuine influence, over the character and quality of schooling in Australia. Many of the problems faced by Australian schools and teachers at the present time can be shown to arise, to a significant extent, from the weakness of the parent market.

Parents have the greatest level of concern with the quality of their children's; education, and they are therefore more likely than anyone else to be effective monitors of their children's progress if provided with the opportunity to do so.

Parent choice implies school systems which have the flexibility to provide the diversity which parents seek and the independence to respond to parental values as they are reflected in market choice. A parent market implies devolution of decision-making to schools on key issues of staffing and curriculum.

Parents within the government school sectors have for too long been deprived of choice so that the only option for many has been to choose a non-government school. The Liberal and National Parties believe that government school parents are equally entitled to exercise a right of choice

and welcome developments in this direction in some of the States.

Problems linked to the restrictions on parental choice at the present time include:

the relatively weak position of government school teachers and their lack of status;

the dependence of government school parents on organised .lobby groups which have very limited capacity to influence centrally determined policies, and which find it hard, if not impossible, to effectively represent

the breadth and diversity of parent concerns and interests. Such groups are subject to capture by politicised minorities, who then claim to speak on behalf of parents;

the concern of many parents that government schools have not reflected their values in matters to do with discipline, social and religious values, curriculum and assessment, stability of teaching and the authority of

principals. Parental influence on government schools is often perceived to be weak, while the influence of state bureaucracies and industrial tribunals and unions is perceived to be strong;

the exodus of parents from the government school systems into private schools which they see as better able to reflect their values. This in turn is often viewed as damaging to the government school systems, which lose the support of many active and involved parents.

22 Supplementary Paper No 4

Extending the rights of parents to choose the school their children will

attend will be a major objective of the Liberal and National parties in government. Pursuit of this objective will involve action to:

increase the scope for parental choice of school within the Government school sectors;

increase the scope for parental choice between the government and non-government sectors.

Choice in Government Schools

While issues relating to the organisation of government schools are principally matters for State governments, there is an obvious and strong national interest in extending the principle of school based management and in building up an informed parent market within the state school systems.

To encourage developments towards more independent and responsive schools within the government school sector, Commonwealth special programs will recognise achievements of individual schools in providing courses and programs of high quality sought by parents for their children.

In recognition that each child attending school is entitled to a basic measure of support, Commonwealth grants for education will be made on account of each pupil at each school in both the government and non-government sectors.

A "Schools of Choice" program will be established under which the Commonwealth will fund best practice initiatives designed to provide special school-based programs within the government schools in science, mathematics, languages, technology, cultural studies and other areas. It will be a condition of funding under this program that schools receiving funding will have the right to admit students according to criteria appropriate to the program on

application from parents.

Other programs detailed elsewhere in this statement are designed to support and encourage moves towards the diversity, autonomy and responsiveness in the government school sector which parents are seeking. These include the school level excellence program in languages other than English, under which schools will be funded by competitive tender, and recipients will be individual schools.

They also include support for 'best practice' initiatives in professional development and in programs for gifted children.

Supplementary Paper No 4 23

These programs represent an additional commitment to schools of $132 million

over a six year period.

4.1.9 Non -Government Schools

Non-government schools are an essential component of Australian schooling. 28 per cent of all school pupils attend non-government schools. The vast majority of children in non-government schools are fromfamilies in the low and middle income ranges.

Non-government schools not only express the right of parents to choose schooling which reflects their values, but the willingness of parents to commit their own resources to schooling on a large scale makes possible a saving to taxpayers of some $1.6 billion. Government funds are therefore able to be concentrated on the government schools.

At present non-government school funding is not based on any secure principle, and is giving rise to considerable uncertainty among parents and the community.

A secure funding formula for the calculation of grants will be established, based on a periodically updated and objective inquiry into the costs of government schooling.

In recognition of the entitlement of all pupils to a measure of government support the Liberal and National Party Government will provide all non-government school pupils with a basic grant equal to 20 percent of the cost of educating a child in a government school.

Beyond the basic grant additional funding will be provided in recognition of the special educational needs of pupils in certain schools. This funding will be based on the identified needs of individual pupils (eg, pupils suffering from disabilities) and partly on a broad school categorisation reflecting the range of

educational needs of pupils attending a school. There will be five categories of schools according to need within which students will attract additional funding to the basic grant.

Funding for each needs category will be based on a percentage of the cost of education of a child at a government school.

Schools currently categorised into levels 10-12 will be grouped into a new needs level 5;

Schools currently categorised into levels 8 and 9 will be grouped into a new needs level 4;

24 Supplementary Paper No 4

Schools

currently categorised into levels 6 and 7 will be grouped into a new needs level 3;

Schools currently categorised into levels 4 and 5 will be grouped into a new needs level 2;

Schools currently categorised into levels 2 and 3 will be grouped into a new needs level 1.

Students attending schools not falling into a needs category will receive the basic 20 per cent entitlement.

Pupils attending schools in one of the needs categories• will received additional funding based on the following proportions of the cost of educating a child at a government school:

Basic Grant Needs

Needs Level 5 - 20 per cent + 32 per cent

Needs Level 4 - 20 per cent + 25 per cent

Needs Level 3 - 20 per cent + 20 per cent

Needs Level 2 - 20 per cent + 15 per cent

Needs Level 1 - 20 per cent + 5 per cent

No school will lose funds as a result of the contraction of the number of funding levels.

The new funding levels will be phased in over three years from 1 July 1994, reaching their full level in the 1996/1997 financial year. In 1994/95 an additional $75 million will be provided over current commitments. In 1995/96 this amount will rise, to $150 million and in 1996/97 to $300 million per annum.

Systemic non-government school authorities will be paid directly the respective total Commonwealth per capita grant in respect of every child enrolled at a primary and secondary school within their particular system.

Each independent school will be paid directly the basic grant for all pupils enrolled at the school plus needs funding (if any) arising from the categorisation of the school.

The remaining cost for non-government school systems and independent schools will, as now, be provided partly by State governments and partly by school fees and fund raising.

Supplementary Paper No 4 25

After initial classification, ` schools will remain within their respective needs

categories. However, if a school wishes to change to a more favourable funding category, it will have an opportunity to state and prove its case. Recategorisation will take place with the fullest consultation with all school authorities.

The Liberal and National Parties will lift current restrictions which effectively penalise school communities which are willing to raise school resource levels through private effort. These restrictions have effectively prevented schools raising their resource levels and hindered the addressing of needs problems.

Following the implementation of the commitment a three year funding plan will then be incorporated in legislation not requiring annual review.

Capital Funding

The requirements for infrastructure have increased substantially because of higher retention rates and changing curriculum requirements. The real annual value of the Commonwealth capital grants program for non-government schools has declined by almost 30 per cent over the last ten years, when increased

student numbers are taken into account. .

The Liberal and National Parties believe that the community interest in a viable and high quality non-government school sector is no longer being adequately expressed in the capital grants program. Accordingly, the incoming Liberal and National party government will double the annual size of the

capital grants program for non-government schools from its 1991 level to $162 million a year. The increased payments under the program will commence in the 1993/94 school year. This level of grant will still require substantial contribution to capital development from the parents and communities supporting non-government schools.

Restrictions penalising school communities which are willing to raise school resource levels through private effort will be lifted.

Capital support will be made available in a way which leaves to the schools decisions concerning the allocation of funds between refurbishment and new developments. .

New Schools Policy

The so-called "new schools policy" has been used to unjustifiably restrict parent choice and will be abolished. Students at schools which meet the basic requirements for State registration will be funded.

26 Supplementary Paper No 4

Accountability Requirements

The current,, unnecessarily intrusive accountability requirements will be removed. Instead, we will ensure proper financial accountability in the

expenditure of taxpayers funds and work in partnership with the States to achieve reasonable and sensible non-government school development.

4.1.10 The Parent-School Partnership

The home environment is the single most important factor in educational attainment. The vital role of parents in the education of their children is recognised in the importance placed on the principle of parent choice in our strategy to achieve schooling of international standard for young Australians.

While we see parent choice as the single most important requirement to raise the quality of schooling in Australia, parental understanding of the role and nature of schooling, and parental willingness and capacity to act as partners of schools and teachers in the educational process, can significantly improve the overall quality of a child's education. Accordingly a Coalition government will encourage the development of programs which enhance the capacity of parents to contribute to the educational process.

4.1.11 National Consultation

Given the primary responsibility of the States and the . non-government school systems and independent schools for school organisation, teacher employment, curriculum and administration the Liberal and National Government will place high priority on establishing effective consultative processes in the pursuit of national goals.

The growth in importance of the Australian Education Council in regard to education policy has increased the need to ensure consultation with school organisations and parents groups who are not represented in the forum of the AEC. Accordingly, the Liberal and National Parties will ensure that there is adequate and appropriate consultation with these groups in the context of the

AEC processes.

The National Board of Employment, Education and Training is not structured to provide adequate independent advice to the . Government and will be abolished. The Schools Council will not be reconstituted, in recognition of the fact that schools are primarily the responsibility of the States, and that the Coalition government , will be moving to dramatically reduce central bureaucratic controls over schooling and to encourage the decentralisation of decision-making to the school level.

Supplementary Paper No 4 27

There is a need to raise the quality of advice available to Government on

education policy. To contribute to assisting the public debate a policy will be adopted of contracting out research into all aspects of education policy. Consultation over policy with interested parties will be an important aspect of policy development under the Liberal and National Party government.

4.1.12 Schooling and Training

To meet both individual needs and the needs of employers in a rapidly changing and competitive world, a convergence is occurring between general and vocational education. General education is important for adaptability to change. Vocational education is increasingly sought by students staying on beyond Year 10.

Schools are facing the need to become more concerned with ensuring that students have the skills that will be need to maximise their employment opportunities. In meeting this requirement it is important that vocational education should not become too narrow, but that an intensified effort is made to ensure that the key competencies needed in the workplace are integrated into the curriculum.

The Liberal and National Parties, through the National Standards program, will work with the States to establish nationally agreed standards in the employment-related key competencies. These ` include language and communication, mathematics, scientific and technological understanding, cultural understanding, and problem solving skills. Competencies will be measured objectively under nationally accepted forms of assessment and reported against agreed national benchmarks.

The emphasis in this program will be on encouraging young people to achieve their highest levels in these competencies. Target levels for attainment of qualifications will be identified.

The Quality of Teaching program which will be established to support professional development will include the expansion of opportunities for teachers to gain experience in industry.

The more flexible and open school systems which will be encouraged by the Liberal and National Strategy for Education and Training will also facilitate increased links between schooling and the workplace.

The Coalition government will encourage the development of credit transfer arrangements between school, training institutions and higher education.

28 Supplementary Paper No 4

4.2 TRAINING OF INTERNATIONAL STANDARD

The level of skills in the workforce is a key determinant of international competitiveness. Australia is lagging badly behind its main international competitors. The development of training ,systems that will allow Australians of all ages to improve their workforce skills is an essential condition for economic success over this decade.

At a time of historically high unemployment, such as is now being experienced, training and retraining have a crucial role to play in maximising job opportunities for those currently out of work and in laying the basis for economic growth in the future.

4.2.1 International Comparison

Recent reviews of Australian post-compulsory education and training have concluded that Australia's current position in relation to skills development "generally falls short of best international practice" (the Finn Report, July 1991), and .even that arguably, Australia is at "the back of the pack" among

industrial nations in this regard. (The Deveson Report, 1990).

"Of all OECD countries, Australia has among the lowest proportion of students aged 16-17 enrolled in vocational programs".

(TAFE in the 1990s, Skills Formation Council)

Of the OECD countries, only Greece has a lower proportion of students 16-17 in vocational training.

While there have been some recent positive developments towards the establishment of national training standards, there remains a very large gap between the levels of skills currently possessed by Australians and those that will be required to ensure that we are internationally competitive.

As the Finn Committee warned:

"Australia will need to pay greater regard to the rapid developments in competitor nations if we are to maintain or improve our performance relative to best international practice".

While teenage participation in schooling and higher education has increased greatly over this decade as a result of a number of factors (from 56.9 to 66.7 per cent of the teenage cohort), participation in TAFE since 1983 has remained fairly constant at 11 per cent.

In Japan, more than 80 per cent of firms provide some formal training for their workforce. In Australia the figure is 24 per cent.

Supplementary Paper No 4 29

Too many young people leaving school do not go on to any further formal

participation in education or training. Only about half of the school-leavers who do not go on to higher education can find opportunities to undertake structured on the job or off the job training leading to some kind of qualification. Around 20 per cent of 15-19 year olds may not have attempted

any form of post-school qualification, including apprenticeships and traineeships.

4.2.2 The Need to Change

Prior to the 1980s, Australia saw little need to become concerned about its international competitiveness. With our small population, large land mass and abundant natural resources, we were able to support one of the world's highest standards of living.

Unfortunately for Australia, rapid advancement in technology in the 1970s and 1980s has led to a relative decline in the value of raw materials (including agricultural products) and an increase in returns from value-adding industries which has left Australia behind and in the grip of an ever decreasing standard of living.

In the same historical sense our manufacturing and process industries developed along the lines of traditional British colonial (top-heavy) management and a craft based trade union structure. That structure set up very rigid and fixed skills training paths appropriate to the craft delineation (or demarcations) which applied in industry.

The craft skills concept and the demarcation concepts no longer have relevance in other countries whose economies have long since left Australia behind. If we wish to survive in the 21st century and if we wish to return to a position of

having one of the highest standards of living in the world then we must give away our training concept based on craft and demarcation and rapidly move to an advanced system of training which is flexible, adaptable to needs, relevant to modern technology, applicable to the desires and capabilities of individuals and capable of certification and practical and financial recognition. Our training must be equal to world best standard, according to world best practice and achieve world best outcomes.

The concept of apprenticeship in a craft or trade with an indenture between employer and employee (trainee) was appropriate in earlier times but now represents a structural impediment to training. It is no longer appropriate in a world of work which increasingly demands personnel with flexibility and broad-based skills.

30 Supplementary Paper No 4

The indenture system, and the requirement of employment before undertaking

skills training, is no longer appropriate. The Australian Traineeship system and the apprenticeship system could be merged to provide initially broad-based' and later more discrete independent skills-based training which encompasses the concept of competency rather than time served and which . provides pathways for further skills acquisition, certification and use.

4.2.3 Objectives

In deciding what goals are appropriate in developing policies to lift the level of skills in the Australian workforce, we regard it as vital that the goals relate not only to participation in programs, but to standards of attainment as well. There is not only a need for more Australians to have advanced skills in the workplace, but these skills need to be at levels which are equal to, or better than, those of comparable people in our main competitor countries.

The Liberal and National Parties believe that it is essential to move towards the national reporting of standards of attainment based on nationally accepted and objective forms of assessment for

the key competencies required for success in the workplace, particularly language, communication and numeracy skills, but extending to scientific and technological understanding.

Further, the Liberal and National Parties accept the conclusion of the Review of Young People's Participation in Post-Compulsory Education and Training (1991), that by the year 2001 at least 50 per cent of people age 22 should have attained at least a vocational certificate, or progress toward a vocational

qualification above Level 3 (as recognised by the National Training Board), or a diploma or degree.

Supplementary Paper No 4 31

Principles of Training Policy

Vocational training should be provided in a wide variety of ways appropriate to the range of needs of those seeking training, including the needs of those at different stages of their careers and life cycles.

• Coherence and linkages between providers in the training they offer should be achieved principally through national competency standards and nationally recognised certifications rather than regulation of courses and providers.

• Vocational training should be provided through a flexible and open training market in which the providers are TAFE and higher education institutions, private providers, community and voluntary groups,industry,professional organisations and industry training advisory bodies.

As far as possible, government funding should be directed to people rather than courses, to leave maximum choice of provider to the person seeking training and avoid the problems which have arisen from centrally regulated and bureaucratic modes of provision.

Those who are currently unemployed should have access to training opportunities which are designed to provide a satisfactory basis for skill development and for entry or re-entry into the workforce.

Vocational training should not be excessively narrow, but rather should aim to provide general skills and knowledge which will encourage adaptability and creativity in the workplace.

The costs of training will be shared between industry, government and students themselves. Our policy will facilitate the expansion of industry contribution to training activities for which industry is the beneficiary.

4.2.4 Labor's Failure

While TAFE is generally the responsibility of the States, the Federal Government has a responsibility to ensure that the national interest in a high level of skills in the workforce is satisfactorily achieved.

While Labor has undertaken some initiatives in recent times, it has never adopted a comprehensive strategy to raise the level of skills in Australia to international levels. Its ideology of centralist control and support for excessive union power has consistently distorted its approach.

32 Supplementary Paper No 4

It has generally resisted the effective monitoring and assessment of the

outcomes of education and training, attempting control through the "input" side.

The Accord has prevented any support for the effective removal of industrial relations rigidities. Indeed, it has given active encouragement to drawing training issues into the industrial relations arena. Award

restructuring has generally not delivered the benefits claimed for it.

It has sought to achieve "performance" by the central imposition of performance indicators without any long-term framework or strategy. It was criticised for this last year by its own Skills Formation Council.

The establishment of the Unified National System of higher education was undertaken without any proper consideration of the relationship of TAFE to the new institutions or of what the ending of the binary system might mean for TAFE.

It has sought to expand training provision in industry by the use of compulsion through the Training Levy. Compulsion inevitably leads to waste and misallocation of resources, and obscures the absence of proper incentives for industry to undertake training expenditure.

If we ever intend to achieve excellence in education and training we must break down the monopolies of the bureaucracy and the unions by devolving responsibility and encouraging competition and choice.

Commonwealth Department of Employment, Education and Training labour market initiatives such as Jobstart and Jobtrain encompass wage subsidies or short training courses without any commitment to structured entry level training. It is the Coalition's view that such initiatives are not cost effective and that they do not in the long term contribute to either a more highly skilled workforce or to job opportunities for the unemployed. As a result of these failures, Australia still lags badly behind our international competitors. We will review such wage subsidy initiatives in favour of expenditure on formal schooling, training and student financial assistance.

4.2.5 Incentives

Our approach to the expansion of education and training will be based on incentives and public information rather than compulsion.

The Training Guarantee Scheme has failed on a practical level in three major aspects.

Supplementary Paper No 4 33

(i)

It has substantially increased the cost of record keeping with respect to training expenditure, and in many proven cases to the detriment of actual expenditure on training individuals.

(ii) It has brought to the attention of some companies their actual level of expenditure (in excess of the minimum) which the companies then determined to reduce as a cost cutting exercise.

(iii) It has become a tax on jobs and has inhibited employment.

The Coalition Government will abolish the compulsory Training Guarantee Levy.

4.2.6 Standards

In achieving best international practice in training the focus of policy should be on the outcomes of training, rather than on attempts to regulate the behaviour of trainers. Central to this strategy is a capacity to provide objective monitoring of the core skills which students should take with them into the workplace.

The standards aimed for should not merely be minimum standards, for there is a danger in such a case that the minimum will become the expected. It is essential that achievement levels which are at international levels should be defined so that progress towards those levels can be monitored.

The Liberal and National Parties accept the recommendation of the Review of Young People's Participation in Education and Training that key areas of competence be defined as essential for all those engaged in post- compulsory education and training, that

appropriate levels of attainment in these areas be defined and that 1995 be a target date for completion of this process and implementation.

As indicated in our policy for World Class Schools, these key competencies would desirably be embodied across the post-compulsory school curricula and levels of attainment in them be monitored as part of the National Standards Program.

The key competencies to be monitored should include language and communication, mathematics, history, politics and culture, science, technology, industry, as well as problem solving and interpersonal skills.

34 Supplementary Paper No 4

Skills in . languages other than English are also important for Australia's,

international competitiveness. The Liberal and National Parties will . establish a precisely targeted set of programs for the development of Australian's skills in languages other than English.

The Liberal and National Parties also believe that there should be explicit assessment and reporting of levels of achievement in the key competencies.

This is important to:

inform students, parents, employers and the community of levels of competence achieved;

to identify areas of disadvantage and, to target resources better;

to strengthen accountability;

to improve teaching.

Reporting should be explicit for the individual student and aggregated to institutional, state and national levels. The Coalition endorses the view of the Finn Committee that objective external testing should form part of the assessment process in at least the language and communication, mathematics

and problem solving areas. External testing can be complemented by other modes of assessment.

Use of the tests for competency would be voluntary for all providers.

Students who enter courses without an appropriate level of competence in relevant areas must be given an opportunity in the course to acquire it.

4.2.7 Languages Other Than English

It is clear that successful exporters tend to be companies who have staff skilled in the languages of other nations.

The Liberal and National Parties will ask the National Languages Institute to devise a strategy plan to meet Australia's trading/tourist needs for priority Asian and European Languages. This plan will specify target numbers in selected languages and describe the expected competency outcomes from them. These statements will be based on actual or projected economic relations between Australia and the target language country. The non-linguistic program content (i.e. engineering Korean, legal. Japanese, business German) will also be described.

Supplementary Paper No 4 35

Industry-language councils in selected areas targeting tourism, manufactured

goods and services will be set up to advise on priorities. Numerical targets will be devised and higher education institutions will be invited to tender for conducting these higher level and vocationally specific programs.

4.2.8 Who Will Provide the Training?

Training policy must be integrated fully with an overall education policy encompassing schools, industry training, tertiary education in all its forms and private education provision. By the same

token, training can no longer be left to the unstructured, hit-and-miss, learn-as-you-go methods of the past. We must set national goals which embrace the needs of industry, business and commerce for specific skills and specific training and meet those goals with a combination of flexible and highly qualified provision.

4.2.9 Industry

Industry has a key role in the provision of skills, either through enterprise-based training, or through the use of external trainers - both private and TAFE. Industry should meet the costs of such training.

Industry also has a vital role to play through links with all levels of education and training in ensuring that these providers are aware of the significance of the workplace for their curriculum.

The Liberal and National Parties welcome the formation of bodies such as the Industry Education Forum and the Business Higher Education Roundtable. There is also an important role for individual enterprises to extend their links with schools and other education and training institutions.

There are currently 125 Industry Training Advisory Bodies, including 22 covering major national industries and occupational groupings. Such bodies can make an important contribution to developing systematic training programs for their industries and advising government, and their development to cover industries presently without such bodies is to be encouraged.

Finally, industry has a vital and expanding role in contributing to entry level training. There are already excellent examples of co-operation between industry, schools and training institutions to provide integrated programs. There are many possible models, and diversity in approaches is to be

encouraged within a framework ' of national standards. Industry and the community must have an important role in driving these developments.

36 Supplementary Paper No 4

4.2.10 TAFE

TAFE has a central role in lifting the level of skills of Australians, : It is the largest provider of post-school education and training and has a particular role in relation to up-grading of adult skills and providing courses for disadvantaged groups.

There are serious structural problems in TAFE arising from the rigidities imposed by the centralised administration and industrial relations arrangements applying to the TAFE systems.

Above all, TAFE must be flexible and responsive to the needs of local industry, and able to provide the training courses which industry requires. TAFE's primary role is to provide high quality entry-level and advanced training for industry.

Total TAFE enrolments grew steadily throughout the 1980s, increasing by 38 per cent to a peak of 952,000 in 1988 before declining in 1989 and 1990. This decline is of concern given the need for higher workplace skills, and reflects the need to ensure adequate funding for TAFE and proper recognition of its key role in the national training systems.

In ensuring that TAFE has the flexibility to perform its vital role structural reform of TAFE systems is essential. This will involve:

ensuring that TAFEs have greater autonomy in relation to staffing and conditions of employment;

a high level of independence for TAFE directors and boards;

the ability to c harge fees where appropriate.

The Liberal and National Parties will work with the States and Territories to ensure greater freedom for TAFE institutions to respond to the needs of their local communities and to rationalise fee paying arrangements.

In resourcing TAFE, institutions should be encouraged to expand the resources raised from fee for service and other activities.

Recognising the key role of TAFE in the national training arrangements, the Liberal and National Parties undertake to ensure that the growth of TAFE is adequately supported, and to this end undertake to increase the funding by $75 million a year above current commitments, or $450 million to fund

growth in TAFE over the remaining years of this decade.

Supplementary Paper No .4 37

4.2.11 Schools

Schools are principally concerned with the provision of sound general education. Senior secondary schools nevertheless have the potential to play an important role in providing general vocational courses. It is to be expected that a variety of relations with TAFE will develop as both schools and TAFE provide

overlapping courses. Definition of these roles is primarily a matter for the States and Territories.

4.2.12 Private Providers

The development of a flexible and open national training market will lead to a continuing expansion in the role of private providers of training services. Increasingly TAFE and private providers will be in competition for students and it is important that these institutions be placed on a level playing field.

Accordingly, it will be important that special programs be open for tender as between TAFE and private providers, and that students seeking training should be able to access public support regardless of whether they attend a TAFE or a private institution. This will require the funding of students rather

than institutions. The Liberal and National Party government will seek to develop with the States a system of TAFE study grants or training credits which will be tenable at any accredited institution offering appropriate training.

4.2.13 Adult Education and Community Agencies

Dramatically increasing retention rates to Year 12 in secondary schools, expansion of tertiary education in universities and increasing places at TAFE over the past decade clearly indicate Australian's acceptance of the need for and desirability of structured education and training. However, the increasing emphasis on structured training as an employment entry requirement now disadvantages millions of Australian adults who finished their schooling at an early age when formal training was not the pre-requisite it has become today.

Adult and community education is the fastest growing sector of education. It consists mainly of short, non-award courses which people take to improve specific skills. Courses range from basic literacy to advanced computer skills. Such programs provide an educational lifeline to many people who have missed out on earlier opportunities. Through such courses many people are empowered to enter the TAFE or the university sector. Adult and community education has more students than the TAFE sector and it is expanding. rapidly because course provision is based on need.

38 Supplementary Paper No 4

The adult and community education sector should remain a State responsibility

but because of its importance in building a competitive Australia, a Federal Coalition Government will support staff development, research and assessment of standards. Through the Australian Education Council the Commonwealth will help to focus attention on the significance of the sector and the importance of strengthening its responsiveness to local communities through devolution of responsibilities.

A variety of models are available to States to provide links into the senior secondary system (such as the Hervey Bay model) either for academic education or vocational training purposes. Senior high schools must be encouraged to open their facilities and courses to adults for re-entry. A change

in culture away from the traditional 'apprenticeship' entry level system will encourage and enable more adults to either change careers or commence a career. All general education and vocational training providers must be encouraged to accept adults into their programs as equally as they accept youth.

4.2.14 Group Training Schemes

Group Training Schemes have proved to be among the most effective and outstanding providers of apprenticeship and traineeship qualifications. Funding for Group Training Schemes will be maintained in real terms and additional schemes - both broad-based and industry specific - will be

encouraged to develop. Schemes which operate in rural and remote areas will be particularly encouraged and financially assisted.

4.2.15 Skillshare

Commonwealth support for Skillshare will remain but there will be an increasing requirement over the decade for Skillshare groups to become self-sufficient by obtaining additional community and local industry financial support.

The Liberal and National parties will establish a program to support the professional development of teachers to support the development of the key competencies framework.

4.2.16 Career Education

Career education is one of the elements of schooling which assists in helping the student to make a satisfactory transition to training, higher education and the workplace.

Supplementary Paper No 4 39

In

involves students' knowledge of industry and its opportunities, their awareness of themselves, how to make effective choices and the skills necessary to pursue a career.

The Liberal and National Parties support a national co-operative effort to raise the profile of career education and develop strategies to facilitate the involvement of business in career education in schools.

4.2.17 Teachers

The demands on TAFE and other providers to provide training which is up-to-date and matches the international standards places a premium on teacher education.

Teaching in TAFE suffers from similar structural problems to teaching in schools. Centralised industrial arrangements have deprived TAFEs of the flexibility needed to offer appropriate conditions to teachers and award rigidities have hindered TAFE from adequately meeting the needs of local industry.

Industrial relations reform, and increased devolution and flexibility to

institutions, must be an essential element of a strategy to improve conditions for TAFE teachers. TAFE must be able to participate competitively in the training market.

The Liberal and National Parties regard the expansion of opportunities for the professional development of teachers as of high priority, and will work with the States to ensure that such opportunities are available.

4.2.18 ` Credit Transfer The days when real jobs were available for fourteen or fifteen year olds, unskilled immigrants, and adult with minimal education and no training are fast drawing to a close. Industry, business and commerce are demanding some

certifiable skills from those entering the workforce. By the year 2000 it is unlikely that there will be any employment available for those without certifiable skills excepting those with entry level training entering the -

workforce through a formal traineeship program. Entry level training over the next decade will become increasingly important.

40 Supplementary Paper No 4

To that extent, our policy of providing vocational training within the envelope.

of secondary schools demands urgent implementation! Other entry level programs such. as formal mechanisms. through TAFE and Skillshare, or programs made available through private providers, will become a basic necessity for . all to enter the world of work. A combination of formal entry' level training in ' combination with formal traineeship programs will, over time, become the, basic mechanism whereby young Australians enter the workforce.

In developing a national entry-level training system, the ability of students to progress from school to higher education, school to TAFE (or comparable; training) and TAFE to higher education, is of great importance. ; Cross-accreditation is essential if these pathways are to be open. At the same time the diversity of institutions needs to be recognised. The Liberal and National Government will encourage institutions to develop cross-accreditation.

Skills attained by individuals, whether by formal structured training or on-the-job training must be recognised to allow portability between employers and. states. It is no longer acceptable, for instance, that an electrician qualified in one State is denied employment in another State because of past demarcation.

4.2.19 Competency Based Training

The Liberal and National Parties support the development of competency based training, and will continue to endorse the activities of the Industry Training Boards and the National Training Board in this regard, while recognising that competency based training is more suitable for fields where clear competencies can be defined, and where rapid change does not impose high costs.

4.2.20 Unemployment and Training

Unemployment has become a social disaster not seen in Australia for sixty years. Those without work must not be abandoned on the dole, but actively helped to return to the workforce. As part of an active employment strategy

unemployed people must be given access to training and retraining programs which will enhance their employability.

The Liberal and National Parties will provide unemployed people with earlier access to programs which combine employment and training. We are not satisfied with the plethora of labour market programs which presently ,exist and offer short-term options. Labour market programs will be integrated into

mainstream training courses.

Supplementary Paper No 4 41

Those genuinely unemployed for nine months or more will be offered

a range of positive workplace alternatives. For the longer term unemployed a steady flow of employment opportunities will be created through a new program to be known as AUSTRAIN. This is a special

program which will allow the unemployed to be hired at training wages which reflect the duration of their unemployment. Employers would be required to move to full minimum or voluntary enterprise wage levels within a specified time.

Responsibility for administering employment and training programs will be devolved from government agencies to local community boards with government representation. A more flexible and community

based employment strategy will be established through Local Employment Boards which will comprise local DSS officials, State or local government training representatives and community and business representatives.

A significant increase in the funds available for voluntary community based organisations and community based programs will be made.

4.2.21 Participation by the Disadvantaged

Opportunities for minimally skilled school leavers are becoming fewer and fewer. At least 6 per cent of teenagers could be regarded as 'at risk', in the sense that their ability to make a satisfactory transition to employment is in question. Among those at risk there are some who are particularly disadvantaged. These include disabled people, Aboriginal youth, homeless youth, isolated and long-term unemployed. Opportunities for women in entry-level training must also be specifically addressed.

It is evident that at the present time the specific needs of people in these at risk groups are not being adequately addressed. The Liberal and National Party's adult and community education policy will enable our Government to work with the States to ensure that people who have been disadvantaged are given the opportunity to rejoin the education mainstream.

4222 Financial Responsibility

Financial responsibility for training must be shared between the individual, industry, State and Federal governments and philanthropic organisations. The Commonwealth will review with the States the need for increased student contribution to enable expansion of provision. Philanthropic organisations will be encouraged to provide training scholarships for individuals and capital

grants for training facilities.

42 Supplementary Paper No 4

4.2.23 Student Financial Assistance

AUSTUDY benefits will be reviewed to ensure that they are appropriate to.. the training sector. The review will consider benefits which reflect general fees and charges in the TAFE sector, eligibility to a wider range of courses, provided by

non-TAFE institutions and eligibility for students/trainees who combine work and study.

4.2.24 Assessment

Assessment in a vocational training sense involves two important concepts:

evaluation of the aptitude of an individual for a particular career choice; and

testing of competencies achieved following either structured or on the; job training.

In order to efficiently utilise our training expenditure and to offer the greatest advantage to individuals, aptitude testing (in conjunction with an effective career education program) during the early secondary years requires a sense of national urgency.

Supplementary Paper. No 4 ` 43

4.3 INTERNATIONAL STANDARD HIGHER EDUCATION

The primary objective of the Liberal and National Parties' policy for higher education is a university system of world class standard, providing the diversity of opportunities required to meet the diversity of student needs.

There must be places in the universities for all students with the will and the capacity to pursue higher education, and no student should be prevented from undertaking higher education on financial grounds alone.

The key role of the universities as the primary location of Australia's basic research effort needs to be strengthened, while recognising the need for responsiveness in university research to the needs of international competitiveness. titiveness.

4.3.1 The Loss of Autonomy

Many of the features now undermining quality in, and access to, Australian universities have their origins in the policies introduced by the Whitlam government which destroyed any financial basis for institutional autonomy, and made the universities financially vulnerable.

The establishment of the National Unified System by Minister Dawkins has created a system of higher education which is directed by political and bureaucratic discretion. Resource allocation is highly centralised, and institutions are tightly regulated with respect to their student numbers and

course offerings.

A narrow, instrumental, agenda was imposed on universities which were seen as adjuncts to the economy. There was no appreciation of the breadth of their role and contribution to knowledge and society. Managerial models derived from corporate models were imposed with no regard to the unique character of the university as an institution.

The fundamental weakness of the framework within which higher education is operating at the present time is that there is excessive reliance on centralised direction and regulation in an attempt to improve efficiency in teaching and

research. Institutions are operating under significant bureaucratic interference and unnecessary restrictions on their managerial autonomy. Financial constraints, rigidities imposed by increasingly centralised industrial relations, efforts at central co-ordination of institutional profiles, restrictions on the development of new programs and on student admissions combine to produce barriers to efficiency and to adaptation to the demands of the student market.

44 Supplementary Paper No 4

The basic research effort of the

, universities has been disrupted, by ad hoc

decision making, and by the damaging "ciawback" of funds from the operating grants for redistribution through the Australian Research. Council. While a strengthening of the competitive component of research funding was

appropriate, this , clawback has hastened the deterioration of the research infrastructure of the universities and deprived them of flexibility in providing encouragement and support to young researchers. Researchers have lost a large part of their decision-making autonomy and the central role of intellectual inquiry and often unpredictable creativity has been undermined.

4.3.2 The Current System

The principal components of the current system are:

central allocation of resources among institutions according to bureaucratic and political discretion;

• government control over the course "profile" of an institution as a prerequisite for funding;

• rationing of places through the imposition of institutional quotas;

a fixed student charge or fee;

a prohibition on admitting Australian undergraduates for fees;

a centralised industrial relations framework.

And Its Effects

These arrangements are having quite damaging consequences for universities in terms of

the quality of teaching and research;

• the efficiency in the allocation and use of resources among and within institutions;

• equity as between different categories of students.

The inadequacies and consequences of this framework are becoming ever more visible:

an "unmet demand" of some 30,000 qualified Australians who are excluded from higher education by government imposed quotas;

Supplementary Paper. No 4 4:5

at the same time, - there is the glaring inequity that while Australian

•

students are excluded, there are some 15,000 full-fee paying overseas students in Australian universities;

• over-enrolments of some 14,000 students as a result of incentives arising from government regulation. These students are largely unfunded, leading to the undesirable consequences of overcrowding;

strong pressures towards uniformity across institutions, and the decline of traditional college-type courses in some regional areas;

• the decline of academic salaries to well below internationally competitive levels leading to serious "brain drain" of some of the best teachers and researchers;

• institutional disruption and demoralisation of staff arising from centrally forced amalgamations;

centralisation of research funding leaving institutions unable to cope with renewal of infrastructure and adequate training of younger graduates;

a looming academic staff shortage estimated to possibly reach 20,000 by the end of the decade;

inefficiencies in the allocation of resources across the system arising from the domination of political discretion and lack of market signals for institutions;

• rising frustration among academic administrators at the prohibition on accessing otherwise available private funds for higher education;

• excess demand for high status courses such as law and medicine.

The Australian Academy of Science has described Australian research scientists as "an endangered species".

The problems being faced by Australian higher education at the present time are the characteristic symptoms to be expected from a centrally regulated system. The appropriate strategy to correct them is a significant deregulation of higher education, and greater exposure of students and institutions to market signals.

46 Supplementary Paper No 4

The Liberal and National Parties' Strategy

The basic philosophy underlying the Coalition's strategy for education is that individuals and institutions should have the freedom to choose their own futures, within very broad limitations. With freedom comes responsibility, including financial responsibility. Given that responsibility, institutions should be largely independent of Government control or interference. Success or failure should depend on merit, not upon winning bureaucratic favour, or a place in a bureaucratically defined quota.

This freedom is essential :

for world class universities to develop;

for effective institutional and academic leadership;

to secure diversity and prevent imposed uniformity;

to restore the confidence of academics in the academic enterprise, and

to underpin academic freedom itself.

The Liberal and National Parties are concerned that there should be strong incentives to promote excellence. Government regulation and imposed uniformity stifles initiative and diversity, and leads to mediocrity. A genuinely competitive framework for higher education will allow each institution to

develop in its own way.

Freedom for institutions, academics and students requires a decisive move away from a centrally administered system to one based on a greatly strengthened student market, in which students can choose their university according to their own judgements and institutions have the flexibility to respond to these choices.

Accountability to the "users" of education is ultimately the only form of accountability which can guarantee institutional and academic freedom, because it relieves institutions of their dependence on one source of finance.

This approach does not imply a "free-for-all" where the disadvantaged are denied legitimate opportunities. Institutions will require accreditation, and financing arrangements will guarantee that no one will be denied a place on financial grounds alone. The Commonwealth will continue to provide the bulk

of the funds for university education, but it will channel this money to institutions through the students, thus creating - from an institution's standpoint - a student market.

Supplementary Paper No 4 47

4.3.3 Restoring University Autonomy

The main features of the Coalition's policy are as follows:

The real level of per student funding of higher education by the Commonwealth will at least be maintained.

Recurrent funding will flow to accredited institutions largely through National Education Awards and Scholarships.

Capital funding will be absorbed into awards over a transition period during which historical inequities among institutions and the competitive requirements of particular institutions will be addressed.

The national education awards will absorb and distribute that portion of research funding which is inextricably linked to teaching. That portion of research funding which is currently distributed to institutions on the basis of research performance will continue to be distributed on the basis of a performance-related formula. This formula will be widened to take account of external research grants and contracts from all sources.

National Education Awards will be awarded on merit within States. Once awarded they will be tenurable at any accredited institution throughout the Commonwealth.

Awards will be available for part-time and full-time study.

The number of awards will be determined on a rolling triennial basis, with the number being not below the number of places currently funded or projected.

National education awards will be tenurable for their full value at accredited private institutions.

Institutions will have the right to offer places to students not in receipt of awards on such terms as they think fit.

• Institutions will in time have the right to vary the student charge by setting course and/or institutional fees. HECS and loan arrangements will be available to ensure that no student is prevented from proceeding to a course on financial grounds.

48 Supplementary Paper No 4

NBEET will be abolished and an independent Higher Education

Commission will be responsible for accrediting institutions and advising the Minister on the state and development of higher education in Australia; the operation of the awards and scholarships scheme; building

projects to be funded from centrally allocated funds; accountability and performance of institutions. Reviews of disciplines will be conducted on a regular basis by persons commanding the respect of the institutions. The publication of information allowing comparative assessment of institutions will be undertaken.

Institutions will be free to offer places as they choose in any course, with limited exceptions. Controls over the number of medical places will be maintained because of the absence of a satisfactory market for medical

services under Health funding arrangements.

Principles of enterprise bargaining and voluntary employment agreements will be restored to universities.

Merit for school leavers to be determined on the basis of Year 12 results. Merit for applicants other than school leavers to be determined through statewide scholastic aptitude tests or recent examination performance,with a proportion being available for allocation on the basis

of institutional criteria and interviews.

Scholarships will be made available to all accredited institutions for award. Scholarships will be awarded for merit and/or need. The number of scholarships allocated to an institution will be determined on that institution's proportion of the previous year's within- state enrolments.

Institutions would be encouraged to award scholarships to a range of students, including school leavers, students completing first year, honours and graduate students, and disadvantaged students. While institutions will be encouraged to develop their own scholarships, a

specified proportion of the scholarship monies provided to an institution must be allocated to full-value scholarships to be known as Commonwealth Tertiary Scholarships.

• HECS will be retained, and will be available to pay course fees up to the standard fee level. For university fees which exceed the standard fee level, loan arrangements will be available, with repayments guaranteed through the HECS mechanism. As a result loans will be available on favourable terms.

To assist students and to encourage up-front payment of fees, the discount rate on HECS will be increased from 15 per cent to 25 per cent.

Supplementary Paper No 4 49

The Australian Research Council will be responsible for the allocation of

the bulk of competitively awarded research funding and for advice to the government on research funding. The processes for the award of research grants by the ARC will be evaluated to ensure that strict criteria of merit are applied in the assessment of applications.

The policy of forced amalgamations will be abandoned, and institutions will be allowed to disamalgamate in certain circumstances. This will be a matter for the Institutions to decide. Each part of a disamalgamated

institution will then require to be separately accredited for receipt of awards.

Implementation

The Liberal and National Parties are currently engaged in detailed consultation with individual institutions and academics, with the AVCC and with tertiary administrators on the detailed implementation of the Coalition program to restore autonomy to universities.

Unfortunately in recent years massive changes have occurred with little consultation and by government fiat. The Coalition is determined to ensure a smooth transition from the current system to the less regulated system projected in the Coalition policy.

As the process of consultation continues further details on the implementation of the policy will be made available. There will of course remain aspects which will be finally determined in government.

Benefits of the New Arrangements

The implementation of the higher education funding arrangements proposed here will have a number of very positive effects on Australian universities.

The funding arrangements will provide continuing, and indeed, strengthened incentives to institutional strategic planning, to define the institution's mission and its place in the market for students;

Diversity among institutions will be encouraged as institutional strategic plans acknowledge the diversity of student requirements, and as a variety of modes of delivery of education are explored.

50 Supplementary Paper No 4

There will be enhanced incentives to devolution of decision-making

within institutions, as the variety of options which will develop in relation to course offerings and delivery, and staffing conditions will be more efficiently handled at levels below the central administration. The pressures towards centralisation on campus imposed by the demands of the unified national system for information and observance of central regulation will be greatly eased.

University administrators will have greater control over institutional budgets through fee structures.

Institutions will have greater flexibility to borrow money for refurbishment.

Funding arrangements for undergraduate and post-graduate students will be unified.

The invidious distinction between full fee paying overseas students and other students will be eliminated.

From the point of view of the allocation of resources across the system of universities as a whole, the funding arrangements proposed above will provide a less politicised, more rational allocation of resources.

Financial and human resources will have much greater freedom to move within the system in response to demand by students and institutions setting their own priorities.

The value students place on different courses will be accurately indicated, and this will assist in the proper targeting of the public contribution to higher education.

The system minimises bureaucratic intervention and bilateral dealing between institutions and government officials.

Accountability to the "users" of the system is strengthened. Student values will have greater influence over the internal allocation of resources by institutions.

The freer system will also be one which will generate a more diverse and higher quality flow of information about universities and their course offerings. All institutions will perceive they have an interest in the production , of information, and students will be seeking information which helps them

evaluate the offerings.

While no institution is guaranteed indefinite access to students the proposed funding arrangements will enhance the ability of newer institutions and institutions less favourably located to compete effectively for students.

Supplementary Paper No 4 51

The transitional capital funding arrangements will take into account the

needs and expectations of newly established institutions for appropriate development.

The scholarship funds will be allocated amongst institutions on the basis of the previous year's enrolments.

The fee flexibility introduced under the new arrangements will provide competitive advantages to lower cost institutions;

The ability of institutions to admit students beyond the government funded places for fees will open opportunities for better meeting of the needs of regional markets and to attract industry-sponsored students.

4.3.4 Strengthening Research

Taken together, Australia's universities role is vital in providing both access to, and a significant contribution to both the national and international research effort.

The particular contribution of the universities is to the basic and longer-term research effort. There is no sharp dividing line between basic and strategic research, but it is important that the longer-term objectives and character of this research should not be sacrificed to policies which place excessive emphasis on short term gains. Other countries such as Japan and Britain are placing increasing weight on the significance of creative longer term research as providing the foundations for a continuing strong contribution of advancing knowledge to national well-being.

Substantial government support for research activities is justified by the fact that much of this research has the character of a "public good" available to all. Such research provides little or no incentive to private investment because its benefits cannot be readily appropriated by private investors. This is largely -though not always - the case with basic or fundamental research. Market incentives will generally not be sufficient to ensure that such research is undertaken. Governments have a role in making up for this limitation of market forces.

There is nevertheless a challenge in ensuring that this basic research does not take place in a way which is isolated from the community in which it occurs. Where it has implications for strategic and applied research these should desirably be readily recognised and pursued. Further, the choice of fields of basic research should desirably occur within a setting which acknowledges the interests of the wider community.

52 Supplementary Paper No 4

This is not to say that there should be any simplistic attempt to impose criteria

of "relevance" on basic research. This would be destructive of the research effort. The Liberal and National Parties reject the attempt to make the content of the nation's basic research effort subject to politically determined national

priorities, while stating that government will, from time to time, wish to direct the attention of the research community to important national problems.

The funding of the basic research effort should secure a high level ` of independence to institutions in determining the priorities for research subject to processes of external peer review.

Thus it is important that there be mechanisms and incentives built into the funding and decision-making arrangements which encourage responsiveness to the needs of industry, so that market success carries with it a capacity to influence the shape and pattern of the public research enterprise.

A variety of mechanisms have been put in place in an attempt to address the fact that a gulf has traditionally existed between public sector research and industry research, and that the rate of commercialisation of research achievements in the public sector has been low.

Mechanisms to bridge the gap include the requirement on CSIRO for 30 per cent external funding, and the Co-operative Research Centres scheme.

There is a real risk that efforts to direct universities towards research links with industry will divert resources from basic research, and thus undermine the research base.

Accordingly, the Liberal and National Parties will implement an Industry/Higher Education Research Incentive scheme, under which institutions will be rewarded with basic research monies when they are successful in obtaining industry contracts.

Industry/Higher Education Research Initiative

The Commonwealth will provide matching grants of 1:5 for industry contracts obtained by university researchers. This money is not to support the contract, which is expected to be fully self funding, but to provide resources for basic research activities. These may or may not be relevant to the contract research. That is a matter to be decided by the researcher.

The scheme provides a mechanism for allocating research funds in a thoroughly decentralised process, where the decisions determining the allocation of funds are those of the researcher who is responsive to market opportunities. It is a decisive contrast to the government's emphasis on centralised research funding,

allowing the pattern of basic research funding to be influenced by market success.

Supplementary Paper No 4 53

It aims to encourage researchers to ` seek out projects with industry by

rewarding them with additional funding for basic research. It will be accessible to all higher education institutions, and will ensure that links with industry are not developed at the expense of the responsibility of the universities for basic research. Up to $25 million a year will be allocated to this scheme.

Concentration of Resources

Australia is not a large nation, and it is essential that resources for research are not spread too thinly to support high quality research.

"The number of basic researchers is probably too great for the level of funding that is available for that research. As a result, Australia's basic research effort is operating at a level which is resulting in a loss of international competitiveness".

(Profile of Australian Science (1989) p. xv)

Paradoxically, and unfortunately, Labor's policy of forced amalgamations is likely to seriously worsen this problem by intensifying pressures to widen still further the number seeking to undertake basic research.

The principle which must provide the basis for funding research is quality, and there must be incentives built into the structure of the higher education research effort which will encourage the voluntary concentration of resources and setting of priorities at the institutional level. It is highly undesirable that

another era of forced re-organisation from the centre be attempted.

The Liberal/ National Party strategy of significantly deregulating the higher education sector with respect to institutional profiles, fundraising, and industrial relations will put in place the appropriate incentives.

Under this strategy institutions will have incentives to diversify their missions, develop plans to raise additional funds, and offer attractive packages to attract staff in those areas in which they wish to specialise.It is to be anticipated that significant concentrations of talent and expertise will develop under this approach.

Priority Setting

There is no alternative to priority setting where resources are limited. The crucial issue is the nature of the priorities set at each level.

54 Supplementary Paper No 4

Under a Liberal/National Party government only broad strategic priorities for

the national research enterprise will be determined centrally, as indicated above.(e.g. the: balance between government and private funding; the scale of the public research effort etc.). Particular disciplinary areas will not as a matter of course be identified as national priorities. The ARC will be encouraged to prioritise in terms of the structural needs of the research effort (e.g. training of postgraduates) rather than in terms of detailed field priorities, and then at the margin. The priority will be quality of international standard.

Within the more flexible institutional structures proposed for higher education, priority setting as between fields will be an important element of institutional research management and planning. It is expected that institutions will develop their own distinctive and appropriate research strategies, and that

individual researchers will select the ;actual research topics.

Greater autonomy in priority setting for institutions will of course take place in a context where there will be a variety of accountability mechanisms which institutions and individual researchers will take into account in making their decisions. These include professional standards, peer review, success in obtaining competitive research grants, market/industry links,and periodic government-supported discipline evaluations.

Research Funding

The Liberal/ National Parties recognise the need for a proper balance between the undirected research funds available to universities and funds allocated on the basis of competitive research grants.

Of first priority in ensuring the survival and health of the research base is the training of graduate students with state-of-the-art skills on the most up-to-date equipment. This issue is inter-linked with that of the shortage of academic staff over this decade revealed by the report on The Academic Labour Market by the National Institute for Labour Studies. There is a need to ensure that the number of post-graduate research awards is appropriate to the requirements for future researchers and teaching staff.

The number of postgraduate research awards will be increased by 200 over and above present commitments and the value of awards will be increased by $2,000.

4.3.5 Exports of Education Services

Australia is well placed to develop its rich potential of selling education, especially in the dynamic Asian-Pacific area. Australia can be a major exporter of education services to the Asia-Pacific area.

Supplementary Paper No 4 55

The Liberal and National Parties support the development of the -capacity of

Australian educational institutions to export educational services. Such services not only have the capacity to bring considerable export income to Australian institutions - and to advantage

Australian students through better staff/student ratios and facilities - but -properly conducted- can be of great benefit to our long-term relations with countries in the region.

So far, "exports" have been in the form of overseas students coming to Australia, but there is considerable potential for offering courses off-shore.

Unfortunately the rapid build up of the export of education services in recent years has been accompanied by gross mismanagement on the part of government, and mismanagement and fraud on the part of a few providers. Australia's reputation has been damaged, and the taxpayer has paid a heavy price in compensation to overseas students whose pre-paid fees were lost.

As the Industry Commission has pointed out, the over-regulation of Australia's domestic higher education system has created limitations on the capacity of institutions to properly develop in this area. It has also given rise to serious inequities between Australian and overseas students. The government has

encouraged institutions to offer full-fee places to some 15,000 overseas students, while prohibiting institutions from offering places to Australian students on similar terms. As a result some 30,000 qualified Australian students are shut out of higher education.

The policy of the government in this area remains poorly co-ordinated between departments, and regulations for the admission of students need review.

The Liberal and National parties have consistently opposed the governments efforts to impose draconian legislation in this area. It is unnecessary and an attempt to shift the blame from the government to providers. It is an area

where, after the disruption of recent years has passed, effective industry self-regulation can be established, and fully adequate procedures to protect students funds can and should be put in place.

The new financial arrangements we propose for domestic higher education will remove the inequities which currently exist between Australian and overseas students. Ending the rationing of places to Australian students will remove the de facto limits which currently exist on the number of places available to

overseas students.

The Liberal and National Parties will ensure that the ability of Australian institutions to develop individual institutional profiles in the international market place is not inhibited by the marketing structures put in place by the government.

56 Supplementary Paper No 4

It is important in this, as in other areas of education, that a strong private

sector develop. As far as possible private providers should be put on the same footing as public institutions. The competitive forces arising from such a system will have beneficial effects in the development of diversity and quality in the range of services provided.

The export of education is an example of what Australian institutions can achieve when they are free to make use of their abilities and initiative. The Coalition's approach to education will allow this potential to be fully realised.

Supplementary Paper No 4 57

SUPPLEMENTARY PAPER NO 5

OPERATION OF GOODS AND SERVICES TAX

TECHNICAL MANUAL

The 15% GST will be introduced on 1 October 1994. This Technical Manual outlines how the GST will operate.

It relies heavily on previously published documents and studies of the

Organisation for Economic Cooperation . and Development (OECD) and the International Monetary Fund (IMF), and upon documents supplied to the Liberal and National Parties by the Governments of Canada and New Zealand.

GST systems operate successfully in nearly all OECD countries including Japan and Germany. There is no question that Australia can also successfully implement a world class tax system.

In the run up to the next election we will move towards finalisation of the administrative and technical details of the new system and in this regard we will consult widely with the business community to ensure that the system is kept as simple as is reasonable.

The close involvement of the business community and their professional advisers at this stage of the planning will ensure the most practical and simple system is put in place. These professionals are intimately aware of the needs for

implementation of the Goods and Services Tax.

We have therefore decided to establish a full-time Goods and Services Tax Planning and Co-ordination Office.

The distinguished Australian Sir William Cole will be Chairman, supported by a small Board of Management.

We have accepted the offer of the Institute of Chartered Accountants in Australia } to assist in organising the establishment of the Goods and Services Tax Planning and Co-ordination Office. The Board will act independently to consult with the Australian business community on all administrative features of the Goods and

Services Tax consistent with the announced policy.

The Board and its seconded professional advisers will receive submissions and comment upon the implementation of the Goods and Services Tax, make recommendations to the Coalition on all 'aspects of the implementation of the Goods and Services Tax and prepare a draft of the necessary legislation.

Supplementary Paper No 5 1

5.1 Wh AT IS A GST?

A Goods and Services Tax (GST) is a tax which is charged on the supply of goods and services in Australia and on the importation of goods into Australia.

To make the GST system as fair and equitable as possible, the tax rate levied shall be uniform and applied to the widest range of goods and services possible.

In taxation parlance, the GST is often described as a 'multi-stage' tax - which means it is levied at all stages of production and distribution, with credits available for the GST paid on business inputs so as to avoid double taxation.

GST is charged, except in the case of exempt supplies, every time a business supplies goods or services in the course of its business activity. GST paid in this way is collected, by the business which supplies the goods or services, on behalf of the Taxation Office and is remitted to the Taxation Office at the end of fixed periods by means of lodgement of regular returns.

GST is not a tax on business or its profits. It is a tax on consumption of goods and services in Australia. It is the final consumer who ultimately pays the full GST liability. Consumers will be compensated for this change by the abolition of the existing wholesale sales tax (WST), payroll tax, petrol excise, and by substantial income tax cuts, together with various social security measures.

2 Supplementary Paper No 5

A simple example

; of WST compared with GST is shown in Table 5.1.

TABLE 5.1

SALE OF TELEVISION SET

Under WST (30%) $ Under GST (15%) $

Wholesale selling price

500.00

Tax 30 per cent 150.00

Cost to retailer 650.00

Mark up (estimated) 100.00

Marked up price 600.00

GST - 15% 90.00

Tax including retail selling price

750.00 Tax including retail selling price

690.00

Saving to consumer . 60.00

Under a GST, price to a consumer should decrease

5.2 AN OUTLINE OF HOW GST WORKS

The GST will be collected by businesses and organisations that are registered with the Taxation Office.

As a general position, any person who is conducting a defined taxable activity may register. However, persons conducting a taxable activity in excess of a determined turnover level (which is proposed to, be $30,000) will be required to register. Below that level of sales, registration will be optional.

Registered persons will lodge GST returns with the Taxation Office at the end of fixed periods of time (proposed 'to be two months for most businesses). In these returns, the person will show total sales and purchases made during: the period. The GST paid by the business on its purchases of goods and services is called

"input tax"` and the tax charged on its sales is "output tax". The input tax is subtracted from the output tax for the period to give the amount of GST payable to the Taxation Office for that period.

Supplementary Paper No 5 3

If, in any period, the input tax exceeds the output tax, the Taxation Office will

refund the excess. The Tax Office will be required to pay interest on late payments.

Through this regular return system, although businesses who are registered for GST will pay GST on purchases of goods and services, a credit (or a refund) may be claimed for this input tax in the GST return. Therefore,. as a general rule, no GST is borne by the business.

Excepting cases of exemption, GST is therefore borne only by the final consumer. It is not a cost to business!

5.3 GST AND BUSINESS

A business which purchases goods and services is entitled to a credit for the input tax on that purchase in the return for the two months during which the purchase takes place. There is no need to wait until the goods purchased have been sold again.

The effect of this crediting mechanism is that the tax rolls forward at each intermediate transaction to the point of sale to the consumer.

A typical small business will be required to charge GST on all its sales and, most importantly, invoices will need to be issued showing the amount of tax charged.

This process allows other registered persons to claim a credit for the tax paid.

Where a business might be involved in buying a large piece of capital, or if its expenses exceed income for any particular periods, refunds can be obtained simply by lodging the GST return.

It is not necessary to accumulate these credits until enough tax is charged to offset the tax already paid. In fact, to facilitate early refunds businesses will be allowed to lodge returns on a monthly basis if they elect to do so and interest will be paid if the Taxation Office is late in making the refund.

GST will be levied on the importation of goods into Australia. The GST will be paid by the importer of the goods to the government at the time the goods are entered for home consumption. GST payable in this way is also an input tax and

able to be claimed as a credit in a GST return in the same way as other input tax, i.e., it is able to be refunded if the output tax for the relevant period is less than the total input tax.

The present concessions applicable to passengers baggage and personal effects will also apply to GST so that travellers will not be adversely affected by having to pay GST on arrival in Australia.

4 Supplementary Paper No 5

5.3.1 Defining Taxable Activities

The term taxable activity is fundamental to the whole concept of GST. Only persons or businesses conducting a taxable activity may charge GST and claim a credit for GST paid on goods or services purchased in the course of that activity.

A taxable activity is an activity carried on continuously or regularly whether or not for profit. Activities carried on in the form of a business, trade, profession, manufacture, association or club are all taxable activities if carried on continuously or regularly.

It includes activities carried out on a continuous or regular basis involving the supply of property (whether real or personal, tangible or intangible) by way of lease, licence or similar arrangements.

Specifically excluded are:

An "employee" as defined in the income tax law whose remuneration is subject to PAYE (i.e., no GST on wages and salaries).

The definition of employee for income tax purposes includes a director of a company, Members of Parliament and members of the Defence Forces who might otherwise not be regarded as being engaged in a master/servant relationship.

Local Government Councillors and other persons who, while not employees, are entitled to remuneration by reason solely of their appointment or election to an office.

Any activity carried on as a private recreational pursuit or hobby.

. The making of supplies of goods or services that are exempt . from GST.

5.3.2 Requirement to Register

As a general rule, any person (i.e., an individual, company, partnership, unincorporated or incorporated society, association or club, or the trustee of a trust) which supplies goods or services in the course of conducting a "taxable activity" will be required to register.

On registration, each person will be issued with a GST number.

Supplementary Paper No 5 5

However, persons having an annual turnover or fee

. income" below a threshold

amount of $30,000 are not required to register, although they can elect to register. Such an election will be advantageous in circumstances where the business is dealing predominantly with registered persons (who will be claiming a credit for GST paid) or where an overall GST refund would result.

Appropriate anti-avoidance provisions will apply to ensure that entities are not established to keep turnovers less than the threshold and thus avoid the requirement to register for GST.

5.3.3 Filing Returns

Registrants must file a return form with the Taxation Office for each reporting period of the registrant. Registrants must file within one month after the end of their reporting period (see sub-section 3.5 below).

5.3.4 Calculation of GST Payable

As a general rule, registrants - in determining their net tax liability - will be able to recover any input tax paid or payable on their business purchases. This will be accomplished by allowing the registrant a refundable credit of the input tax on goods and services acquired during the return period.

This input tax credit will be:

GST paid or payable on purchases of taxed goods and services in Australia;

. GST levied on goods imported into Australia;

3/23rds of the purchase price of second hand goods acquired from an unregistered person who has not charged GST on the supply of those goods (see section 4.8 below).

The input tax credit will be subtracted from the output tax to determine the registrant's net GST liability or refund.

Since an input tax credit would be claimed only with respect to a purchase which has borne GST, the following payments would not be included in determining a taxpayer's input tax credit:

payments in respect of wages and other remuneration paid to employees (see section 3.1);

. payments made to businesses that are not registered for GST purposes;

6 Supplementary Paper No 5

payments in respect of interest and dividends;

tax-exempt supplies made to a taxpayer (see section 4 below).

In essence, all that is required is that the registrant adds up the total output tax and the total input tax shown on the invoices received for the period and includes those figures in the GST return for the period.

Table 5.2 shows the typical flow of funds in any small business enterprise.

TABLE 5.2

CALCULATION OF GST PAYABLE

Taxable Sales (not including zero rated sales) times GST Rate equals Output Tax

minus

Input Tax Credit equal

Tax Payable Tax Refundable

(if positive) (if negative)

e.g. GST e.g. GST

Sales $200,000 30,000 Sales $180,000 27,000

Purchases $150,000 22,500 Purchases $200,000 30,000

Tax Payable 7,500 Tax Refund 3,000

GST Rate of 15 per cent

5.3.5 Calculation of GST Payable and Lodging GST Returns

The mechanics of ascertaining which supplies are accounted for in a particular period can be technically and administratively involved.

The Coalition propose to have such matters, as well as the length of the taxable periods, determined through the process of the GST Planning and Co-ordination Office and interested parties will have input to the mechanics of the GST system through that process. However, at this stage, our preferred position is to adopt the taxable periods operating in New Zealand. That is:

Supplementary Paper No 5 7

One month taxable period.

Any person may apply to the Taxation Office to • be allocated a one month taxable period. However, any registered person with a turnover exceeding, or likely to exceed, $24 million in any 12 month period must have a one month taxable period.

Two month taxable period. This would be the standard taxable period. Registered persons will be allocated a two month taxable period at the time of registration unless they request otherwise or, having a turnover exceeding $24 million, they are required to adopt a one month taxable period.

Six month taxable period. Any registered person whose turnover in any 12 month period is less than, or is likely to be less than, $250,000 may apply to the Taxation Office to be allocated a six month taxable period.

The taxable periods would generally end on the last day of the month. The end date of a taxable period can be altered and another date, up to seven days either side of the end of the month, can be used instead. This ensures that no disadvantage arises in accounting for. GST to those persons who close off their accounts on a particular day of the week rather than at the end of calendar months.

Payment of the GST would be due on lodgement of the GST return - on or before the last working day of the month following the end of the taxable period.

Finally, interest will be payable by the Tax Office on late GST refunds as well as being payable by the taxpayer on late GST payments.

Accounting for GST

Generally, output tax and input tax will be included in the GST return for the taxable period during which either,

an invoice is issued for the supply; or

part or whole payment is made for the supply.

It is also proposed that a cash basis of accounting for GST be made available to registrants with small businesses (turnover less than $1,000,000 p.a.) who prefer to prepare their GST returns on the basis of cash paid out and cash received

during the taxable period.

In other countries which operate GST systems, there are special rules for some categories of supplies, e.g., lay-by sales are brought to account when property in the goods passes to the customer. The Coalition will ensure that interested parties have a significant input to the final determination of these matters, prior to implementation, through the process of the GST Planning and Co-ordination Office.

8 Supplementary Paper No 5

Groups, Branches and Divisions

Registered persons who are legally related entities may elect to be treated as a group for GST purposes. Once grouped all of the group members are treated as one registered person, thus enabling only one GST return to be lodged and eliminating the need to charge and collect GST on intergroup supplies of goods and services.

Registrants which operate as branches or divisions will be able to elect to be registered separately for GST purposes. While this means that GST must be charged and collected on inter branch transactions, some business will find it administratively easier to treat their various branches as separate businesses and to lodge separate GST returns.

5.3.6 Invoicing for GST

To ensure the integrity of the system, supporting documentation in the form of prescribed tax invoices will need to be maintained by each business. This invoice will need to be produced for the taxable supply of all goods and services.

The provision of invoices with specified Goods and Services Tax information will probably be one of the most significant changes required of a business under the new Goods and Services Tax system, although some businesses - particularly those with international franchises - already have systems in readiness.

Typically, a tax invoice for high value supplies will need to contain the following information:

. the words "tax invoice";

. name and registration number of the supplier;

. the name and address of the recipient;

• the date upon which the tax invoice is issued;

• the quantity or volume of the goods and services supplied;

• the total amount of the tax charged, the consideration excluding tax and the consideration inclusive of tax for that supplier.

Supplementary Paper No 5 9

Quantity

Description of Goods & Services and unit price Net Cost Total

4 VCR @ $1.000.00

Plus Goods & Services Tax

$4,000.00

$4.000.00

$ 600.00

$4,000.00 Value of

goods and services

Total of GST

$4,600.00 charged Total Amount Due

An example of a GST invoice is set out below.

Name of Supplier

The words Supplier's GST

'TAX INVOICE Registration

Number

Tax Invoice

GST No. 99-999-999

Date: 20.9.91

ABC Electronics Limited 113-117 Vine Street GPO Box 99 SYDNEY NSW 2000

To: West Video Ltd 10 John Street MELBOURNE VIC 3000

Name and Address of Recipient

Consideration of the goods and services supplied

10 Supplementary Paper No 5

5.3.7 Private and. Business Use.

An important issue is determining the GST credit where supplies are used for both business and private or exempt purposes.

Full details of the necessary mechanics of "apportionment" where there maybe a mixture . of both private and . business and exempt use of supplies . will be announced in Government, after full consultation with interested parties.

5.3.8 GST on Fringe Benefits

Fringe benefits provided to employees are deemed to be a supply of services for GST purposes, and GST is payable by the employer.

In summary, the position is that the value of services provided by way of fringe benefits will be the same as the value on which fringe benefit tax is imposed.

Of course, where goods or services are treated as exempt or zero-rated for GST purposes (see section 5.4 below), the general rules will also apply for fringe benefits tax purposes. Therefore, for example, the provision of low interest loans is excluded for the purposes of these calculations as this form of benefit constitutes

a financial service which is generally exempt (see subsection 4.6 below).

5.3.9 Income Tax Deductibility and GST

Generally, GST is not a tax borne as a business expense by registered persons, because of the GST credit allowed on inputs. Accordingly, for income tax purposes, assessable income and allowable deductions will be calculated excluding GST.

However, where a business does not register or the GST paid on inputs is not available as a credit (for example, where supplies are exempt), then the GST will, depending on the nature, of the underlying transaction, normally be treated as a

revenue expense or capitalised as part of the cost of an asset acquired.,

For income tax purposes, GST will be deductible if the outgoing to which it relates is deductible or may qualify for tax depreciation if the asset to which it relates is depreciable.

5.3.10 Time of Supply in Assessing GST Tax Liability

Determining the exact time of supply is an important issue in calculating when GST liability is due. This is a technical matter for which the Coalition will refrain from taking a final position until it has undertaken negotiations with interested parties when in government.

Supplementary Paper No 5 11

5.3.11 Implementation of a GST: Transitional Measures

One of the most difficult issues to deal with from Opposition in developing a policy on GST is the transition and implementation details.

Issues such as how to treat goods previously taxed under the sales tax regime but sold under the GST regime are relatively straight forward and we have provided funds for crediting sales tax paid on trading stock. Other issues such as the treatment of long term contracts and various timing of invoicing around the implementation date, can raise requirements to specify dates of application and

other time periods.

That said it is impossible for the Coalition, while in Opposition, to give every last detail on transition arrangements.

The GST Planning and Co-ordination Office will be asked to examine the:

• early lowering of high sales tax rates to minimise the possibility of market "bottle necks" or "droughts" in the lead up to the GST implementation day;

payment of the tax credit on wholesale sales tax payments on pre-GST purchased stock for a period of time following implementation;

5.4 TAX EXEMPT, ZERO-RATED AND OTHER SUPPLIES

The academic literature and real world experience strongly suggest that the base for the GST should be as comprehensive as possible and that there should be a uniform tax rate applied to that base. This:

• minimises distortions that otherwise would arise between goods and services that are taxed and those that are outside the tax net;

minimises opportunities for avoidance and evasion and greatly simplifies the administration of the GST; and

ensures that the introduction of the GST represents an improvement over the indirect taxes that it replaces.

Ideally, it would be desirable to include all of what is known to economists as "private final consumption expenditure" in the GST base. However, some exceptions are required on practical grounds and the preferred base has been calculated with this in mind.

12 Supplementary Paper No 5

Goods and services, which are "zero-rated" will not carry any tax burden. Goods

and services that are "exempt" will be subject to the GST on their business inputs and this GST will not be refundable. These exempt goods are treated this way generally because of the administrative difficulties of imposing the tax at the point of consumption.

In summary, the recommended GST base includes all private final consumption expenditure, except:

• health • education • government provision of non-commercial activities • welfare and religious institutions • exports • businesses sold as a "going concern"

which are all zero rated.

In addition, exemption from GST (i.e, input taxing) will apply to:

• residential rents and construction; other building construction; • financial services; and gambling and lotteries.

The scope and extent of these exceptions to the general application of the GST. are discussed in detail in the following sub-sections.

5.4.1 Health Services

The following items will be zero-rated for GST purposes:

provision of health care provided by medical practitioners., dentists, opticians, physiotherapists, podiatrists, acupuncturists, clinical psychologists and similar paramedical practitioners;

the provision of in-patient and out-patient health care by public and commercial hospitals and nursing homes;

purchases of medicines, medical aids and therapeutic appliances.

The zero-rating extends to the supply of medical. devices and includes such items as canes, stretchers, wheelchairs, prosthetic devices, hearing aids, dentures, eyeglasses. Services relating to the installation, maintenance, repair or

modification of such devices are also zero-rated.

The supply of cosmetics and toiletries is not zero-rated.

Supplementary Paper No '.5 13

The provision of prescription drugs as defined by federal and state legislation will

be zero-rated. Where necessary, a number of drugs which do not require prescription under legislation but which are used to treat serious medical conditions, will also be zero-rated. This latter category will be the subject of detailed discussion with health professionals before implementation of the GST.

Drugs for animal use prescribed by veterinarians will be taxable under the GST which of course will be rebateable if a business input (eg. in the case of famers).

A full list of zero-rated items will incorporate those goods in this area currently carrying the sales tax exemptions, and will be released when in government prior to the implementation of the GST.

For all intent and purposes, all health care services will also be zero-rated. Similarly private health insurance will be tax free.

Health care services provided by a public or private hospital, nursing home, or a facility offering similar services for children or the mentally disabled, will all be zero-rated. The definitions for these services will be based on definitions contained in existing federal and state legislation.

In addition, private nursing services provided in these institutions, or to individuals in their homes, will be zero-rated.

The health services zero-rating will apply to fees charged by health care institutions to their patients or residents to cover accommodation, meals and health and personal care services.

Separate charges for other services provided by these institutions that are not health related (eg meals served in a cafeteria to visitors) will be taxable in the normal manner under the GST.

A health care practitioner will generally have to be licensed or otherwise certified to practice in Australia in order for his or her services to be zero-rated for GST purposes. Grey areas will be subject to review between the federal and state governments prior to the implementation of the GST.

5.4.2 Education Services

The following services are zero-rated:

purchases of educational services. Examples of the types of expenditure covered are

14 Supplementary Paper No 5

-

educational services provided by schools, universities, colleges and other institutions that generally lead to a degree, diploma or trade certificate;

- charges for tuition and fees paid for the above services.

Zero-rating does not extend to provisions of food or beverages to students, or school bus services, or similar examples.

It is our intention to specify the organisations which may be regarded as educational institutions for the purpose of claiming GST zero-rating along similar lines as is currently applied for sales tax purposes. Therefore, included in the definition, besides those bodies mentioned above, would be

• pre schools; • Sunday schools; • kindergartens (but not play groups or child care centres); • bible colleges;

• correspondence schools; • schools of the air; • business/secretarial colleges; • courses for entry into regulated professions or occupations.

Instruction in courses which are part of a program to develop or enhance students' occupational skills will be included in the zero-rating. However, this must be the primary purpose. As a general rule, instruction and training in sports, recreational or cultural activities such as dancing, skating, wine-tasting, cooking, sailing or swimming will be taxable.

However, private tutoring which provides instruction in the required subject matter of an academic course forming part of a school curriculum, for example, will be zero-rated.

In the case of private boarding school students, the tuition fees and accommodation fees will be zero-rated. However, the food purchased and prepared for boarders will be subject to tax.

5.4.3 Supplies by Public Sector Bodies

The public sector is taxable if the goods or services are provided in the course of commercial activity.

Goods and services are zero-rated if they comprise a regulatory activity or are non-commercial in nature, for example:

Supplementary Paper No 5 15

drivers' licences;

• • passports; • trade permits; trade mark fees;

• governmental services like defence, law and order.

In the European Community, the taxation of public sector bodies are subject to the provisions of what is known as the Community's Sixth Directive.

The Directive provides, in general, that state, regional, and local governmental bodies are not required to pay the tax except in respect of those activities for which non-taxation would lead to "significant distortions of competition."

The Directive also provides that such bodies must, in general, be taxed in respect of the following activities:.

telecommunications; the supply of water, gas, electricity and steam; • the transport of goods; • port and airport services; • passenger transport; • supply of new goods manufactured for sale; • the transactions of agricultural intervention agencies;

the running of trade fairs and exhibitions; warehousing; the activities of commercial publicity bodies; the activities of travel agencies; • the running of staff shops, co-operatives and industrial canteens and similar

institutions; the activities of a commercial nature of public radio and television bodies.

Also commonly included are agricultural and forestry undertakings.

The general definition of commercial activity noted above will be used in defining what will be taxed in Australia.

It is already decided that activities such as the provision of postal services will be taxable.

However, it is the Coalition's intention that rather than giving broad definitions of commercial activities that will be taxable, when in government we will explicitly define in legislation supplies made by public sector bodies that will be excluded from taxation.

Until that time the general test applied by the European Community will give a good guide as to our intentions.

16 Supplementary Paper No 5

5.4.4 Local Government

As indicated above, local government authorities will be treated for GST purposes in the same manner as state and federal government bodies. That is, those activities that are non-commercial in nature will be zero-rated. For example, the extent to which local government rates pay for non-commercial services (like the

maintenance of parks and gardens or the provision of public libraries) they will be GST free.

However, those activities which would lead to "significant distortions of competition", to use the European Community's test (see subsection 4.3 above), between local government authorities and private sector businesses will be taxable under GST.

For example, it is our intention that services such as rubbish collection and disposal provided by local government authorities will all be subject to GST and be eligible for input tax credits.

4.4.5 Building Construction, Leases and other Real Estate Transactions

Building Construction

(i) Residential Construction and Sale

In respect of new housing, the GST will not apply to the final sale price. Instead, the Liberal and National Parties have decided that building materials and products used in residential construction, land development, home improvements

and repairs and maintenance will be input taxed.

Excluded from input taxing is the builders margin and the contract labour element, which comprises around 50 per cent of the actual home cost excluding the land element. Further details relating to the mechanics and application of this approach will follow after extensive consultation between the housing industry and the GST Planning and Co-ordination Office.

Finally, existing homes and land to be used for residential purposes will be exempt from GST upon sale.

(ii) Commercial Construction and Sale

The in-principle approach of the Liberal and National Parties is to treat newly constructed commercial buildings as an exempt supply, where only the building materials used in their construction will be input taxed. Consequently, the end sale of a building will not attract GST.

Supplementary Paper No 5 17

The input taxing approach as adopted in the Hawke Government's Draft White

Paper avoids the problems of having to distinguish between building materials for residential housing and materials used in commercial buildings.

The GST tax base has been calculated relying on this approach and this remains the preferred GST treatment of this sector. However, the Liberal and National Parties are open to industry submissions on alternative approaches if they are considered more workable and efficient. The GST Planning and Co-ordination Office will be the mechanism to assess these alternatives.

(iii) Non-building Construction

Non-building construction such as roads, dams, bridges, power generation facilities, plant etc will be taxed in the normal manner with GST credits available to the business developing the project.

Leases

(i) Residential Leases

All rentals of 30 days or more in a residential dwelling will be tax exempt. Consequently, residential landlords will not be entitled to recover any input tax incurred in the provision of this accommodation.

This contrasts, for example, with shorter-term rentals in a hotel which will attract GST and the provider will be able to receive the appropriate GST rebate.

(ii) Non Residential Leases

As a general position, these leases will be tax exempt. However, as is the practice in many countries (eg Netherlands and Sweden), the supplier can apply tax if the purchaser agrees and is registered and the land and building are for use in a taxable activity.

Real Estate Transactions

Real estate selling commissions will attract GST, however GST will not apply to the stamp duty imposed on property transactions.

5.4.6 Financial Services

As in every overseas country, financial services will be GST exempt and input taxed. The following reflects the scope of the exemptions in New Zealand, and indicates the direction of the Coalition's intentions:

18 Supplementary Paper No 5

.

the exchange of currency;

• the payment, issue, collection or transfer of ownership of cheques, travellers cheques and letters of credit;

• the issue, drawing, acceptance or transfer of ownership of a debt security (this includes mortgages and other loans).

• the issue, allotment, or transfer of equity securities (eg stocks and shares) or participatory securities (eg shares in special partnerships);

underwriting or sub-underwriting the issue of an equity, debt or participatory security;

• the renewal or variation of a debt, equity and participatory security or a credit contract;

• the provision of credit under a credit contract. This includes the credit element in hire purchase agreements, loans, mortgages, overdrafts, credit cards and financial leases;

• the provision or transfer of a life insurance, life reinsurance or superannuation contract;

. the provision of a futures contract through a futures exchange;

• the payment or collection of any amount of interest, principal, dividend, or other amount whatever in respect of any debt security, equity security, participatory security, credit contract, contract of life insurance, superannuation scheme or futures contract;

• arranging or agreeing to do, but not advising on any of the above, eg mortgage broking.

Persons providing any of these services cannot charge GST on them.

Secondary financial services such as financial advice, debt collecting and the rental of safe deposit boxes will attract GST.

Exported financial services will be zero-rated.

5.4.7 Insurance

GST will not apply to life insurance, fire and general insurance or superannuation contracts. Instead, these services will be treated as exempt.

Fire and general insurance are of a similar character to financial services and, as in all but one OECD nation, it is given exempt status.

Supplementary Paper No 5 19

5.4.8 Second-Hand Goods

No GST will be payable on sales of second-hand goods by private individuals who are not registered for GST. For example, there will be no GST on private sales of goods, including sales of homes, cars, etc, by one private individual to another.

No GST will be payable where registered persons make private sales of second-hand goods (as described above) which are not part of their taxable activities.

In the conduct of business registered persons selling second-hand goods must account for GST on those sales in the normal way. However, those registered persons may claim a notional input tax credit on the purchase price of those goods.

Example:

A second-hand car dealer buys a car, tidies it up and puts it on the lot with a warranty and the reputation of the firm behind it, along with other services, such as access to finance, which are not available in a private sale.

The dealer is entitled to a notional input tax credit on the purchase price.

When subsequently he sells the car, it is only the value of the 'extras' which are effectively subject to GST.

In the dealer's GST return, the notional GST together with the GST paid on all other business purchases made during the return period, eg electricity, stationery, etc would be deducted. Similarly, the dealer would be accounting for output tax on all taxable sales made during the period.

This same system of claiming a notional input tax credit applies to all purchases by registered persons from non-registered persons of all types of second-hand goods. This assumes that the registered persons are making the purchases in the course of their taxable activities.

If a registered person buys second-hand goods from another registered person who is selling those goods as part of a business activity, GST will be payable on that sale. In these cases, the purchaser must obtain a tax invoice in order to claim an input tax deduction.

5.4.9 Sales of Donated Second-Hand Goods

Sales of donated goods and services by non-profit bodies are exempt from GST. For example, funds raised from a garage sale or a cake stall will not be taxed if the goods sold are donated. Sales of donated goods, such as second-hand clothing and household items, which are sold in opportunity shops and similar retail

outlets, are exempt from GST, if the shops are run by non-profit bodies.

This provision in no way affects the tax free status of charities and religious institutions (see subsection' 4.14 below).'

20 Supplementary Paper No 5

5.4.10 Sale of a Business as a "Going Concern"

When a taxable activity is sold as a going concern by one registered person to another registered person, the sale is zero-rated.

When part of a taxable activity (capable of separate operation) is sold as a going concern, the sale is zero-rated.

5.4.11 Exported Goods

Goods that are, or will be, entered for export and goods that have been exported by the supplier qualify for zero-rating.

Where a farmer exports directly, or is a member of an exporting co-operative which operates as an agent for its members (ie the farmer retains ownership of his product until it is exported), zero-rating will apply to his exports.

Exported goods include:

• materials used in the repair of goods that are temporary imports (eg a ship in a harbour that needs repair), provided they become an integral part of that temporary import. To be zero-rated, any consumable goods used must become totally unusable or worthless as a result of the process of repair;

stores supplied to aircraft and ships for use outside Australia;

5.4.12 Goods Not in Australia at the Time of Supply

Goods located and supplied outside Australia by an Australian resident are zero-rated unless they are to be imported into Australia.

5.4.13 Certain "Exported" Services

Services performed outside Australia, and some services performed in Australia, are regarded as "exported" services and are zero-rated.

(i) Transportation of Passengers and Goods

Zero-rating applies only to international transportation and to services that form a part of that transportation.

With the transport of passengers these services include:

the international journey and air travel within Australia, provided that it constitutes international carriage, is booked at the same time as the international journey and is provided through the same agent supplier;

Supplementary Paper No . 5 21

the insuring or the arranging of insurance;

. the arranging of transport.

Example:

A person visits a local travel agent and purchases an air ticket package which provides a flight from Brisbane to Sydney and onto Auckland. As the package is considered to be "international carriage", GST is charged at zero per cent on both flights.

With the transport of goods, these services will include:

• the international journey and transportation within Australia (including loading and unloading costs) where the transport is part of the international transport and the same person supplies the internal and international transport.

Example:

A manufacturer arranges to export goods to New Zealand. A freight company is retained to transport the goods from the factory in Australia to the final destination in New Zealand. The services supplied by the freight company to the manufacturer qualify for zero-rating.

(ii) Services related to Land Outside Australia

Services supplied directly in connection with land or buildings situated outside Australia are zero-rated. These may include: architectural, real estate and legal services.

Example:

An Australian architect designs a building to be constructed on an overseas property for an overseas client. The charge for this service is zero-rated.

(iii) Services Related to Moveable Personal Property

Zero-rating applies to services performed directly in connection with property situated outside Australia.

For example, an Australian insurance company provides cover for a motor vehicle located in the United Kingdom. The fee for this service is zero-rated.

(iv) Services Related to Goods Temporarily Imported into Australia

Services directly relating to goods which are temporarily imported into Australia are zero-rated. Examples of the type of goods in this category are international aircraft, ships and cargo containers.

Any type of service supplied directly relating to such goods is zero-rated. It is not restricted to repairs and maintenance, although they will usually be the most common of the services performed.

22 Supplementary Paper No 5

(v)

Services performed outside Australia

Services which are physically undertaken outside Australia are zero-rated.

(vi) Services Supplied to Non-Resident Outside Australia

Services are zero-rated when supplied to a person who is a non-resident and who is outside Australia when the service is supplied.

For example, any charge for legal advice given to a person living in New Zealand by a lawyer resident in Australia is zero-rated.

However, zero-rating does not apply to services performed directly in connection with:

land or improvements in Australia;

goods situated in Australia at the time the services are performed;

• agreeing to stop carrying on a taxable activity inside- Australia.

(vii) Granting of Rights for Use Outside Australia

Services relating to copyrights, patents etc when they apply outside Australia are zero-rated.

For example, an Australian publishing company has the copyright on an Australian author's book. The company sells the overseas copyright to an Australian company. Because that other company will be 'using' the right by publishing and selling the book overseas, the fee it pays for the right is zero-rated.

(viii) Restraint of Trade

Any amount received for agreeing to refrain from carrying on a taxable activity outside Australia is zero-rated.

5.4.14 Charities and Religious Institutions

In recognition of the special role performed by charities and religious institutions, they will be zero-rated for GST purposes.

Zero-rating carries with it the obligation for the charity to be registered for GST purposes, but the rate of tax applied to outputs is zero. Under this arrangement, the registered institution will be able to claim a refund of GST paid on all its inputs.

Supplementary Paper No 5 23

It is intended that an additional concession to this group will include providing

more flexibility in the timing of lodgement of returns, coupled with less onerous conditions regarding invoice requirements. Before the introduction of the GST this will be discussed with charitable and welfare groups.,

Some activities by charities and religious institutions compete directly with businesses in the community. In these situations, GST will be charged to customers. However, GST will not be charged on the sale of used or donated

goods.

It is not the Coalition's intention to impose the GST such that charitable and religious institutions become less effective in delivering their services. In government, we would seek to correct any implementation difficulties that might eventuate.

5.4.15 Non-Profit Organisations

GST would apply to non-profit organisations in the normal manner. For example:

a person or an organisation that has registered for GST purposes, eg a club, pays 15 per cent GST on all goods and services purchased for club use. But the GST is subsequently claimed back by the club as a credit - therefore no GST is borne by the club;

the club adds 15 per cent onto the price it charges for all the goods and services it supplies and pays this amount, minus the input tax, to the Tax Office -therefore the GST is paid by the buyers/recipients of the goods and services.

Example:

A soccer club made up of 10 teams is registered for GST purposes. The club outfits its teams with uniforms from a sports shop for $10,000, plus 15 per cent GST, which is $1,500. (This $1,500 is the club's input tax). The final price the club pays the sports shop is therefore $11,500.

At the same time, the club bills its 300 members for annual subscriptions of $100 each, plus 15 per cent GST, making the final subscription $115 per member. When all are paid up, the club has received a total of $34,500, including $4,500 GST (output tax). The club deducts from the $4,500 output tax collected the $1,500 input tax already paid to the sports shops and sends only the balance, ie $3,000, to the Tax Office.

In practice, the club would have had a number of costs on which GST will be paid. These include travel costs, equipment, postage and dues paid to parent bodies. As with the input tax paid on the uniforms, the club would also deduct output tax it

collected on subscriptions when calculating the amount payable to the Tax Office.

24 Supplementary Paper No 5

The club treasurer would, therefore, add up all the GST that the

club has paid, on

these purchases (inputs) and deduct this from the total GST that the club has charged and collected on subscriptions, hiring of facilities, sales, sponsorship receipts etc (outputs). The net difference is the amount of tax the club must pay the Tax Office, or the refund due to the club. Where a club buys new equipment or has a lot of maintenance work done, it could be in a position of receiving a GST refund.

In practice, the club does not have to wait until subscriptions are paid in before it claims a deduction for the input tax paid on the uniforms in, the example above. The club can deduct all the input tax in the period during which the purchases are made.

Similarly, the sports shop which collected the $1,500 GST on the sale of the uniforms in the example above will deduct from this its own input tax.

So it can be seen that all the GST is passed on through the buying and selling chain and only the final consumers, in this case the club members who pay the subscriptions, actually pay the tax and cannot claim it back.

5.4.16 Tourism

(i) Domestic Travel

All Australian travel products or services will be liable for GST, eg hotels, motels, airfares, buses, ferries, conference venues, rail fares.

The GST will be collected by the supplier direct for, eg, accommodation and meals. Alternatively it will be collected by a travel agent if the booking and payment is made by the consumer to the agent, eg for air tickets.

(ii) Outbound Travel

The transportation of passengers out of Australia is zero-rated, ie no GST will be charged to the consumer on any outbound travel products such as air and ship fares.

Policies of travel insurance provided to residents travelling overseas are exempt from GST.

(iii) Inbound Travel

The transportation of passengers into Australia is also zero-rated. However, the traveller will be charged GST on all goods and services consumed in Australia.

Supplementary Paper No 5 25

(iv)

Passenger Transport

(a) Domestic Air Travel

GST is payable on all domestic air travel.

Tickets will be issued either on a GST inclusive basis or on a base fare plus GST basis and will be in the form of a tax invoice.

(b) International Air Travel

International travel is zero-rated (ie no GST is payable by the customer).`

(v) Goods Purchased by Foreign Tourists

Goods purchased by tourists while in Australia will be subject to GST as with any other supply of goods and services in Australia. However, overseas tourists are able to purchase goods free of GST if the supplier exports them from Australia (eg by mailing them to the tourists overseas address). Further, through the network

of Duty Free Stores in Australia, zero-rating can be achieved by overseas travellers, including Australian residents by using the existing sealed bag system.

5.4.17 Gambling and Lotteries

Gambling and lotteries will be exempt from GST.

GST will not apply to actual gambling or lottery winnings, since these are not received as consideration for any supply.

5.4.18 Fine Metal

Zero-rated if:

supply by refiner to dealer; it is the first supply after refinement; and • it is to be used as an investment.

Exempt otherwise.

26 Supplementary Paper No 5

SUPPLEMENTARY PAPER NO 6

HOW LARGE IS THE BLACK ECONOMY?

6.1 INTRODUCTION

The "black" or "cash" economy is, by precise definition, of unknowable size. However, there have been many serious academic research papers written, worldwide, to establish a measurement of its size in any particular economy.

According to the Federal Parliamentary Library Research Service, "there is general agreement that the size of Australia's black economy is in the vicinity of 10 per cent of Gross Domestic Product "(ie National income).

Indeed there are many people who would say that this is a gross underestimate. However, if we assume that the 10 per cent figure is near correct, Australia's black economy equates to around just short of $40 billion per annum.

Commonwealth government revenue suffers greatly from the loss of collections from this "hidden" economy. Indeed as the Federal Parliamentary Library Research Service notes, even a black economy estimated at 10 per cent of GDP may indicate losses in revenue in the order of $9 billion.

This paper examines the academic literature on the topic of the subterranean economy.

6.2 DEFINITION OF BLACK ECONOMY

There is no clear agreement among experts as to the definition of the "black" ("cash", "underground", "shadow" or "hidden") economy.

The Treasury "Draft White Paper on the reform of the Australian Tax System", June 1985, defined it as:

"The aggregate of unrecorded economic activity which escapes measurement and tax assessment, due generally to its reliance on cash transactions but also for other reasons such as illegality."

(Australian Government (1985) Glossary 6)

In an article published in the Economic Record of September 1984 Dr Michael Carter, then of the Australian National University, described the black economy as follows:

Supplementary Paper No 6 1

"The underground economy involves those economic activities which are

embraced by current definitions of measurable economic activity but which are not captured by current measurement techniques."

(Carter (1984), p 210)

It is noteworthy that neither definition includes household (do it yourself) production. While this is judged to be very substantial these days, like the services of housewives it is excluded from Gross Domestic Product estimates (ie estimates of national production) by the accepted convention of all major

international statistical agencies.

For example, the central Statistical Office of the United Kingdom's definition of the black economy is similar to those above:

"The economic activity generating factor incomes which cannot be estimated from the regular statistical sources used to compile the income measurement of GDP,,

Accepting this line of definition, the main components of the "black" economy comprise:

legal undeclared income:

- by the self employed - for example, by the understatement of sales/income and overstatement of expenses;

- arrangements for wages payment in whole or in part, in cash - for example, see recent evidence before the current NSW Royal Commission into the building Industry;

- moonlighting - for example, a second job under an assumed name;

- social security cheats - for example, claiming unemployment benefits while still working;

- personal income in kind.

illegal income from such activities as drugs or prostitution.

Everyday experience and the abundance of anecdotal evidence points to the reality of a substantial black economy.

Everybody who has had to get repairs done to their house or has engaged in any type of business activity has been confronted at some time by the existence of the "black" economy.

2 Supplementary Paper No 6

The acknowledged growth of the black economy over the past 20-30 years has been

largely due to the fact that there is simply more incentive to conceal transactions. The main contributors to this have been a higher tax burden and increasing regulations (ie, more "red tape").

In many developing countries, for example,. overseas studies suggest that the strangling effects of licensing and regulations is the major factor in "illegal" or "informal" sectors in those countries. They are probably as large again as the regular economy.

The actual size of the black economy is also determined by opportunity and the, general state of tax morality (ie, willingness to comply with the requirement to pay taxes).

In respect of tax morality there can be no doubt that, in face of the, large and ever increasing reliance on personal income tax in Australia there has been some lessening of the general acceptance of the responsibility for tax compliance in the

community.

The published instances of minimal tax paid by some large companies, by the accumulation of profits in tax havens and the tax deductibility of the interest costs of large scale debt financing and other factors, have contributed to a build-up in

the community's view that the tax system is simply not fair. And, if the tax system is perceived as not being fair, the willingness of people to circumvent it increases.

6.3 MEASURING. THE IMMEASURABLE

As noted above, by its very nature the black economy is immeasurable in any definitively accurate sense. However that does not mean that academics have not been able to estimate its magnitude.

World wide, there has been extensive investigation into the methods of estimating the extent of the black economy. Appendix 1 of this paper lists a number of useful references on this subject.

To begin with, researchers focus on what is the motivation for people to indulge in the black economy. Principally there are two reasons:

rising burden of taxation; and

rising incidence of government regulation and red tape.'

Starting from this point researchers have concentrated on three measurement procedures of the black economy:

Supplementary Paper No 6 3

6.3.1 Survey Method

The Survey Method involves directly surveying or sampling people in the community as to their involvement in cash economy activities.

Such methods have been used in a number of Scandinavian countries.

For example, a 1984 study in Denmark estimated that the black economy there was in the order of 5.5 per cent of GDP. (see Schneider and Hofreither (1987) p22)

Of course the Survey Method is inherently flawed by the fact that it relies upon voluntary replies and is subject to chronic underestimation.

6.3.2 Macroeconomic Approach

The Macroeconomic Approach (for want of better terminology) to identify the black economy involves a number of different statistical methodologies. However, they all revolve around the identifiable gap in the measurement of the size of any domestic economy that arises from the comparison of various broad-range economic indicators.

The sophistication of these comparisons can range widely.

They start with the crude, but simple examination of the measured difference between the size of GDP collected from, alternatively, the expenditure side or the income side of the national accounts balance sheet. The method suffers from the simple statistical sampling errors common to the compilation of all OECD national

accounts and makes it hard for an analyst to discern what result is caused by the black economy as opposed to statistician's error.

However at the more "sophisticated" end of the research can be found what is known as the "Transactions Approach" developed by Professor Edgar Feige of the United States. This method compares and contrasts the size of total nominal GDP to the volume of total money transactions in the economy.

As a variant, the "Currency Demand Approach", originally developed by US Professor Phillip Cagan, in the 1950's (and further refined by Professor Pierre Gutmann and Professor Vito Tanzi) attempts to isolate the demand for cash in the economy and how that differs from declared income and production statistics.

This method however focuses in on "cash" and relates the demand for excess cash to the taxation burden. As a result, a weakness of this analysis is that it can potentially underestimate the size of the black economy because it only takes account of this one factor as the motivation for the black economy. This "single

cause" problem is seen as a defect' of most of these approaches.

4 Supplementary Paper No 6

6.3.3 Multiple Indicators Approach

Finally the Multiple Indicators Approach seeks to econometrically model, as best as available data can allow, the size of the black economy in a domestic economy.

This method tries to model both the effects of the burden of taxation and the burden of regulations on the incidence of taxpayers to conceal their economic activity.

6.4 INTERNATIONAL EXPERIENCE

Overseas research suggests that while it may be difficult to measure the size of the black economy there is . ample evidence to suggest that it can be roughly measured and that it can represent a sizeable proportion of individual 'OECD

domestic economies,

The general results of overseas research suggest that the size of the black economy represented a range of 5.3 per cent to 30 per cent of GDP throughout OECD countries.

Table 6.1 below is derived from a table summarising various overseas 'studies published in Schneider and Hofreither (1987) and indicates the significance of the black economy.

X

Country

Size of the Black Economy (% of GDP)

1960 1978 1980

Austria 1.4-4.6 6.2-8.9 2.1 8.5-10.8

Belgium 4.7 8.7 20.8

Canada 5.1 6.7-11.8 10.1-11.2

Denmark 3.7-4.8 8.1-9.2 6.9-10.2

Federal Rep of Germany 2.0-3.7 7.6 10.3-11.2

Finland 3.1 6.7-9.4 -

France 5.0 7.2 -

Ireland 1.7 11.4-30.0 8.0

Italy 4.4 4.1 -

Japan 2.0 9.6 -

Netherlands 5.6 9.2-10.0 -

Norway 1.3-4.4 6.5-23.0 10.2-10.9

Spain 2.6 12.5-13.2 -

Sweden 1.5-5.4 4.3-6.3 11.9-12.4

Switzerland 1.2 3.3-11.0 6.5

UK 4.6 3.7-8.3

USA 2.6-6.4 3.9-6.1

Supplementary Paper No 6 5

It is also worth recording, that in a 1990 article, Mr Bruce Bartlett, Deputy

Assistant Secretary for Economic Policy in the US Treasury Department, notes that "the latest estimate from the Internal Revenue Service of the revenue lost to the underground economy is $84.9 billion for 1987. This suggests an underground economy of roughly 10 per cent of GNP." [Bartlett (1990) p26]

Finally, some reference should be made to the impact of the introduction of goods and services tax on the black economies of Canada and New Zealand.

Mr Ian Bennett, Senior Canadian Finance Department official recently stated that little net revenue had flowed from the black economy following the introduction of the goods and services tax in Canada.

However, it is critical to note that Canada already had extensive retail sales taxes at the provincial level (akin to Australian State government level) as well as the new Federal - level Goods and Services Tax. As Mr Bennett noted, where a retail level sales tax was already in existence the dividend from the black economy would probably be significantly smaller anyway.

As for New Zealand, the Treasury there has never publicly released their estimates of the size of the black economy at the time the goods and services tax was introduced in 1986. Therefore there is no hard evidence of how much revenue was collected through the goods and services tax from the black economy.

However it is noteworthy that Sir Roger Douglas, the former Minister for Finance has noted that income tax revenue increased much more than the New Zealand Treasury expected in 1986, but was unable to apportion a quantitative share of this increase to black economy revenue captured via the goods and services tax.

All that we can reliably know is that business registrations under the goods and services tax system in New Zealand were expected by the Treasury to total about 180,00. In fact they quickly grew to nearly 300,000 and now stand at about 370,000. What this means is that many more businesses have been brought into the New Zealand income tax net than was previously forecast.

6.5 AUSTRALIA: EVALUATION OF THE SIZE OF THE BLACK ECONOMY

The Reserve Bank noted in its 1990/91 Annual Report, that there had been strong. growth in demand for $100 and $50 denomination notes.

Indeed growth in the demand for notes and coins jumped from 5 per cent the previous year to 14 per cent in 1990/91, which compares to a very low 2 per cent rise in the growth of credit during last year. This may give some indication that the black economy is alive and well in Australia.

6 Supplementary Paper No 6

As the Reserve Bank noted: "There has been little further

shift towards the. ,so-

called "cashless society" over the past three decades: the community retains, 'a strong demand for notes and coins" (p 47).

Specific estimates as to the size of the black economy in Australia have. been put-forward by the (then) Commercial Bank of Australia - 10.7 per cent of GDP in 1978/79; Dr Neville Norman of Melbourne University - 13.4: per cent of "recorded private-sector GDP", or $17.5 billion in 1983/84; and the 1985 Draft White. Paper -

which is not inconsistent with the Norman estimate.

It will doubtless be strongly argued, by the Government that whatever was the case in 1985, with the introduction since then of the Fringe Benefits Tax, Capital Gains Tax, substantiation, the Prescribed Payments system (then under way), the. Cash Transactions Report Agency, and so on, the scope for "evasion" is less.

However as against that, the fact is that despite the reduction in tax rates,; because of "bracket creep" a much larger number of people confront relatively high marginal rates, and therefore a much larger number of people are subject to. strong incentives to fiddle.

Total income tax on individuals as a per cent of total wages, salaries and supplements has risen from 23.9% in 1979/80 to 29.2% in 1988/89.

Moreover, despite the surge in revenues from the new income tax sources listed above, it has not facilitated a fall in the marginal income tax rates faced by most average Australians. While the top marginal rates have come down from 60% to 47%, since the 1983/84 those with moderate incomes face higher marginal tax rates.

On these grounds, Dr Norman's estimate of 1983/84, for example, provides a still valid estimate.

He used a sophisticated version of the most widely accepted "monetary" approach to calculating the "black" economy (see previous section "Measuring the Immeasurable".) That method, the Gutman-Tanzi Method, focuses on the demand

for currency (cash) relative to demand deposits and the differences that appear between this measure and other indicators of economic activity.

Applied to the latest data this method suggests a black economy could be approaching $40 billion.

Applying the 1989/90 ratio of final consumption expenditure to disposable income, a goods and services tax of 15 per cent, for example, could yield, roughly, $4.4 billion. That is what is technically termed- the "fiscal dividend" that would

be derived from the impact of a goods and services tax on the,. "black" economy. Allowing for a somewhat higher saving ratio (as some would suggest exists for "black cash"), might result in an increased yield of about $4 billion.

Supplementary Paper No 6 7

A goods and services tax of 10 per cent, on the same basis as above, might yield

a fiscal dividend of roughly $3 billion.

It is of interest that these orders of magnitude are consistent with estimates in the Government's own Draft White Paper of 1985.

In the Draft White Paper (section 3.7) it is stated that "income tax evasion may involve a revenue loss of at least $3 billion per annum". In addition, the Draft White Paper states that avoidance by a variety of tax shelters, exemptions and concessions, "runs to several billions of dollars". A then (1984/5) tax loss of the

order of $3-5 billion is consistent with Dr Norman's estimate of $4.4 billion on his monetary (modified Gutman-Tanzi) approach or $3-4 billion on his survey analysis approach.

Elsewhere the Draft White Paper estimates the "fiscal dividend" at $1.5-$2.0 billion. This implies a cash economy base of in the order of $19-25 billion, which when increased in proportion to the price index increase since then, would indicate a cash economy of around $35 billion, almost identical with the "Norman"

estimate.

6.6 COALITION'S FIGURING

In the Coalition's computations for the package, we have adhered to a conservative approach' in calculating the ''fiscal dividend" from the black economy. Whilst we believe 10 per cent of GDP is a reasonable estimate we have used the more conservative figure of around 5 per cent.

6.7 CONCLUSION

Any Australian who has had renovations done to their house is aware that the "black" economy is alive, and prospering, in Australia.

Despite any number of tax changes made by the present Government the absence of any direct attack on the "black" economy through the failure to replace the sales tax system with a goods and services tax has meant that billions of dollars in tax cheating has been let go free.

The Australian taxation system is unfair especially to the struggling workers in middle Australia.

It is of vital necessity that income tax rates are significantly reduced. This can only be accomplished by the tax mix change that accompanies the introduction of a goods and services tax.

8 Supplementary Paper No 6

Supplementary Paper No 6

9

APPENDIX 1

LIST OF REFERENCES

1. Australian Government, Reform of the Australian Tax System Draft White Paper .1985

2. Barthelemy, Philippe "The Macroeconomic Estimates of the Hidden Economy: A Critical Analysis", OECD November 1985.

3. Bartlett, Bruce, "The Underground Economy: Achilles Heel of the State?, Economic A ffairs , June/July 1990.

4. Bascand, Geoffrey M "Implications of Alternative Tax Bases: with particular reference to Direct and Indirect Consumption Taxes" in John G Head (Ed), Australian Tax Reform in Retrospect and Prospect ", Sydney 1989.

5. Carter, Michael "Issues in the Hidden Economy - A Survey", Economic Record, September 1984.

6. Norman, Neville R The Economics of Personal Tax Escalation in Australia CEDA (George Allen and Unwin Australia Pty Ltd), 1985.

7. Norman, Neville R Tax Escalation Revisited, CEDA, Information Paper IP31, October 1989.

8. Paquet, Gilles "The Underground Economy" Policy Options Politgues, Jan/Feb 1989.

9. Schneider, Friedrich and Hofreither, Markus, "Measuring the Size of the Shadow Economy", Economic Affairs December/January 1986/87.

10. Trengrove, Chris D "Measuring the Hidden Economy", Australian Tax Forum , Autumn 1985.

11. Victorian Employers Federation, The Employers' Tax Plan, CPS, Monash, 1989.

10 Supplementary Paper No 6

SUPPLEMENTARY PAPER NO 7

WHY PAYROLL TAX SHOULD BE ABOLISHED

"Don't have any doubt in your mind that what the number one objective of the Trade Union Movement is, is to get an increase in employment, to cut down on the levels of unemployment and we believe that the abolition of payroll tax can provide the opportunity of doing that"

(Bob Hawke, ABC Radio, 25 November 1977)

7.1 INTRODUCTION

Payroll tax was introduced by the Commonwealth Government in 1941 to finance child endowment. It was transferred to the States in 1971 to broaden their tax base and provide them with a growth tax.

As so often happens with government revenue measures the payroll tax has long since lost its original purpose. Instead, rather than serving a useful social purpose payroll tax is a highly regressive tax that hits the poor hardest - principally by denying many of them jobs.

The tax base of the States is currently restricted to a range of indirect taxes -payroll taxes, stamp duties, franchise fees, financial institutions duty, gambling - plus taxes on property and user charges (mainly on motor vehicles). Payroll tax is the largest single source of State taxation revenue, accounting for about one-third of total State revenues exclusive of Commonwealth payments to the

States.

This paper argues the case for the abolition of payroll taxes to be funded by the introduction of the Goods and Services Tax by the Commonwealth Government.

A recurring theme in debate over reform of Commonwealth-State financial relations has been the need to replace the hodge-podge of State taxes with a broad based tax on either income or consumption. Constitutional restrictions on the ability of States to levy excises would preclude the Commonwealth from levying

a Goods and Services Tax on behalf of the States at rates that vary among the States.

Supplementary Paper No 7 1

Nonetheless, the introduction of

a Goods and Services Tax by the Commonwealth

does provide the opportunity to, in effect, replace one or more existing State taxes with the Goods and Services Tax. This will be achieved under the next Coalition Commonwealth government by setting the Goods and Services Tax rate to finance new. grants the States that, were conditional on the States abolishing payroll tax, and were equal to payroll tax revenue presently collected by the States. The

net effect of these measures will be to replace payroll taxes with the Goods and Services Tax, leaving both Commonwealth and State budget positions unaffected.

It will be argued that, superficially, this approach would exacerbate the problem of vertical fiscal imbalance, which is an undesirable feature of the present Commonwealth-State financial relations. Of course, in fact under the arrangements detailed below the Commonwealth is merely acting as a tax collecing agent for the States so that the balance between the Commonwealth and the States, will not change.

The Coalition has a comprehensive policy to address the problem of vertical fiscal imbalance, which has been separately outlined.

7.2 THE INCIDENCE OF PAYROLL TAXES

While firms are legally bound to pay payroll tax - once their wage bill exceeds a threshold level- a question of significance in assessing the economic impact of payroll tax is whether:

firms are able to pass on the cost of payroll tax to consumers; or

to pass it back to workers in the form of lower wages or reduced employment; or

whether the legal and final incidence of payroll tax are one and the same (that is, both rest with the firm).

Dr Neil Warren's analysis of the incidence of Australia's payroll tax led him to conclude that:

" ... in the short run the economic incidence of the PRT [payroll tax] is on capital but in the long run it is distributed between labour and consumers.

(NSW Tax Task Force, Vol 2, Jan 1988, p107)

This conclusion rests, in part, on the proposition that because capital is

internationally mobile, it will move, with a lag, to where owners of capital obtain the highest after tax rate of return. Thus, capital may escape bearing the burden of payroll tax in the long run. The issue then is whether the burden falls on consumers or employees.

2 Supplementary Paper No 7

In a perfectly competitive domestic market (but with labour generally

internationally immobile and labour supply relatively unresponsive to changes in after-tax wages) much of the payroll tax burden would fall on labour. However, given the Australian centralised wage fixing system, it seems more realistic to assume that wages will tend to be relatively unaffected by changes in payroll tax,

except (as pointed out by EPAC) that employees may seek compensation for price increases due to changes in payroll tax. In the circumstances of "sticky wages" that generally characterise the Australian labour market, it seems reasonable to

assume that ultimately much of the burden of payroll tax falls on consumers in terms of higher prices.

To the degree to which this conclusion is correct, it seems reasonable to regard payroll tax as having some of the characteristics of a consumption tax.

To the extent that consumers ultimately "pay" firms' payroll taxes - in the form of higher prices - why replace the payroll tax by a Goods and Services Tax which also is paid by consumers and therefore has similar economic effects?

Professor John Head of Monash University argued this point at the June 1985 Tax Summit. As a theoretical exercise, it is possible to posit the assumptions required whereby a broad-based consumption tax such as a Goods and Services Tax is equivalent to a broad-based tax on wages such as payroll tax. These assumptions

are as follows:

there is no initial period wealth;

there are no bequests, or bequests are taxed as consumption in some way;

capital markets are perfect, there is no uncertainty; and

all income can be classified as wage income or capital income accumulated after the initial period.

Under these conditions a wage tax and a consumption tax are equivalent in the sense that the discounted present value of the wage base equals the discounted present value of the consumption base for tax purposes.

In practice, however, these conditions do not come close to approximating reality.

The same question could have been raised in respect of the wholesale sales tax, which also is ultimately passed on to consumers. The answer is qualitatively the same: namely, that because the tax base of a Goods and Services Tax is broader and the rate scale more uniform, the Goods and Services Tax involves less

distortions than the taxes it is replacing. The shortcomings of the payroll tax system are discussed in the next section.

Supplementary Paper No 7 3

7.3 THE DEFECTS OF

AUSTRALIAN PAYROLL TAXES

Australian payroll taxes suffer from a number of defects relative to a comprehensive, uniform rate Goods and Services Tax which raises the same revenue. These include the following:

even if the same payroll tax arrangements applied throughout Australia, such taxes are imposed on the value added by labour alone, rather than the total value added of the firm: that lack of comprehensiveness suggests tax biases affecting choice of production inputs - especially as between labour

and other inputs (in laymen's terms payroll tax imposes a bias against labour at a time of high unemployment);

• although some moves have been made recently towards harmonisation, payroll tax arrangements do in fact differ somewhat between States: the payroll tax regime is not uniform across Australia;

• the payroll tax system is non-uniform even within each State: payroll tax is applied only when payrolls exceed specified levels, and, in some States, the rate of tax applied above those payroll thresholds is not uniform (either because a surcharge is applied to "large" payrolls and/or because the payroll

tax includes rebates for decentralisation, employment of apprentices and employment of people under the age of 21 entering their first job);

marginal rates of payroll tax are highly variable, both because of exemptions for small payrolls, and surcharges in some cases for large payrolls and because concessions are clawed back as payrolls move above these thresholds, giving rise to much higher effective payroll tax rates in the claw back zones;

the payroll tax system is not rebatable in respect of business inputs or in relation to exports: this is of particular concern in the internationally traded goods and services sector, where scope for passing the tax on in the

form of higher prices is more limited;

Australia's heavy reliance on payroll tax puts us at a competitive disadvantage: Australia's reliance on payroll taxes (5.4% of total tax revenue in 1987) is exceeded within the OECD only by Austria (5.9%) and is well above the OECD average of 1%.

As with the Federal wholesale sales tax, therefore, the payroll tax "system" is neither comprehensive nor uniform. The remainder of this Section illustrates in more specific detail the nature of these defects.

4 Supplementary Paper No 7

TABLE 7.1

Level of Payroll at Which Payroll Tax is Payable ('000 p.a.) (as at 1/1/90)

New South Wales 500

Victoria 410

Queensland 500

Western Australia 320

South Australia 414

Tasmania 500

Australian Capital Territory 500

Northern Territory 400

While payroll tax regimes vary to a certain extent among the States, each State exempts firms with payrolls below a threshold (see Table 7.1). This exempts the majority of small business from the obligation to pay payroll tax. For example, the Office of State Revenue has estimated that only 15% of New South Wales employers are subject to payroll tax. However these 15 per cent of employers nonetheless employ a large proportion of workers in the state.

Indeed, for Australia as a whole, rough estimates suggest that payroll taxes apply to around 60% of private sector employment -that is to say around 3.6 million jobs.

Following the State Under Treasurers' Report in 1990 on Tax Harmonisation, most States announced increases in payroll tax exemption levels to apply from part way through the 1990-91 fiscal year. The New South Wales Government entered into a commitment to index the payroll tax-free threshold on 1 January

1989.

Increasingly, the rising burden of payroll tax payments has fallen on the larger employers of labour who dominate the traded goods sector. Indeed, in its report into the New South Wales tax system, the NSW Tax Task Force expressed its concern:

"In this regard, an important statistic is that in 1986-87 753,000 persons out of a total labour force of around 1.4 million (or about 54%) were employed in the larger firms subject to the payroll tax surcharge. ...

(page 213).

Supplementary Paper No 7 5

Another distortion is that States tend to levy payroll tax solely on wages and

fringe benefits, exempting superannuation (except for NSW) and workers' compensation premiums.

" ... As such, payroll tax discriminates against both the employment of labour (as opposed to the use of capital) and the payment for labour services in the form of wages and salaries (as opposed to other forms of remuneration).

(NSW Tax Task Force, Jan 1988, p213)

Further distortions to the payroll tax base arise from the exclusion from tax of lump sum termination and retrenchment benefits, and several States exclude contractual or agency arrangements.

Another distortion occurs in terms of the differential impact of payroll tax on industries according to their labour intensity. Service industries and labour intensive manufacturing industries bear a larger payroll tax burden than other industries on average.

The net result is that, despite some moves in recent years to harmonise tax rates and exemption levels, average rates of tax vary widely from State to State, as illustrated in Table 7.2

TABLE 7.2

Average Rates of Payroll Tax (%) (As at 1 January 1991)

On $1 Million Payroll

On $10 Million Payroll

New South Wales 3.5 6.7

Victoria 4.1 7.0

Queensland 3.3 5.0

Western Australia 3.6 6.0

South Australia 3.7 6.0

Tasmania 5.8 7.0

Source: NSW Treasury.

There are also significant variations in the effective rate of payroll tax across

industries. In estimates relating to New South Wales in 1981-82, Warren found the average effective rate for 111 industries was 3.6%. However, within the 111 industries, 10% had effective rates of zero (or less than 0.5%), while 27% faced effective rates of greater than 5%. More than three-quarters of industries facing

effective payroll tax rates of greater than 5% were engaged in manufacturing.

6 Supplementary Paper No 7

In summary, there are substantial design defects evident in

respect of Australia's

payroll tax. As a means of raising general revenue, there are superior alternatives. For example, as noted by the Asprey Committee in 1975:

" ... VAT has some common ground with payroll tax and with company income tax. When VAT was introduced in Britain in 1973, it replaced purchase tax, which was a wholesale sales tax, and selective employment tax, a type of payroll tax based on the wages of certain categories of

employees and paid by employers. ... The introduction of VAT might need to be accompanied by discussions between the Australian Government and the States about the future of payroll tax. A VAT running alongside such a tax would involve an element of tax on tax that would be difficult to avoid.

(Taxation Review Committee, Jan 1975. p521)

The substitution of Goods and Services Tax for payroll tax would offer benefits in terms of better tax system design. As noted by EPAC:

" ... The most likely area of significant difference would be the effect on competitiveness of the taxes on the traded goods sector where consumption or sales taxes would appear to have some advantages over payroll or income taxes.

("The Economic Effects of Payroll Tax", October 1985, p2)

7.4 BENEFITS FROM THE ABOLITION OF PAYROLL TAX

Australia has a chronic unemployment problem and now faces the enormous problems of having nearly 1 million people out of work. There is a desperate need for a national effort to reduce this intolerable level of unemployment.

The imposition of payroll tax amounts to a tax on employment and actively discourages employers from taking on extra workers.

Payroll tax is, in itself, a distortionary tax system because its impact on the'cost of labour varies across States and industries. If it were abolished, the following benefits would accrue:

new jobs would be created: indeed, the Australian Chamber of Manufactures estimates that 175,000 new jobs would result;

the impact of the payroll tax on investment and its cascading effect on the cost of capital equipment would be removed;

Supplementary Paper No 7 7

the extra costs built in to the price of exports by the impact of payroll tax

would be removed so helping to make Australian exports more price competitive;

the lack of transparency which typifies payroll tax would be removed.

7.5 ABOLITION OF PAYROLL TAX

As part of its comprehensive taxation reform package the Coalition parties intend to use part of the proceeds of the Goods and Services Tax to fund the abolition of state and territory payroll taxes.

In order to secure the States' support for this approach, the arrangements would have to:

be based on the principle of revenue neutrality, for both the Commonwealth and the States. Each State would require an increase in grants from the Commonwealth to offset the payroll tax it had foregone;

ensure growth in these grants in line with growth in the Goods and Services Tax base; and

provide as much security for the grants as possible from interference from Commonwealth governments in the future.

These objectives could be met by the Commonwealth enshrining the arrangements in special legislation. The legislation would provide that in the year of the abolition of payroll tax each State would receive a separately identified "payroll tax abolition grant" from the Commonwealth equal to the average of its total payroll tax collections over the three prior years, where prior year collections are

escalated to dollars of the day by the CPI. (This averaging would be necessary, rather than linking grants to the latest year's collections, in order to prevent a State from raising its payroll tax rates dramatically in the year of transfer.)

The amount of each State's grant so calculated would be expressed as a percentage of the Goods and Services Tax base. This process would ensure that payroll tax abolition grants automatically grew in line with the growth in the Goods and Services Tax base.

The incorporation of these provisions in legislation would provide a guarantee for the States that, in the future, Commonwealth governments would find it very difficult to renege on the arrangements.

8 Supplementary Paper No 7

The States could also draw comfort from the fact that they would not be

surrendering any sovereignty to the Commonwealth through these arrangements. If a subsequent Commonwealth government sought to cut or abolish payroll tax abolition grants (after amending the relevant Act), it would always be open to the States to re-introduce payroll tax.

We anticipate that prior to the next election and for political purposes, the Labor State Premiers may publicly reject this proposal to abolish payroll tax, on the grounds that they oppose the introduction of the Goods and Services Tax. We have no doubt whatsoever, that given the election of the Hewson Government with its mandate to abolish payroll tax, the States will readily embrace our proposition to boost jobs. Attached herewith are a number of quotes from senior ALP figures, including Labor Premiers, stating their unequivocal opposition to payroll taxes.

Also included are quotes from policy documents of the Australian Democrats stating their opposition to payroll taxes.

Supplementary Paper No. 7 9

FEDERAL LEADERS ON PAYROLL TAX

7.6 SENIOR ALP FIGURES - PUBLIC COMMENTS ON PAYROLL TAX

BOB HAWKE ON PAYROLL TAX

"Don't have any doubt in your mind that what the number one objective of the Trade Union Movement is, is to get an increase in employment, to cut down on the levels of unemployment and we believe that the abolition of -

payroll tax can provide the opportunity of doing that."

(AM 25 November 1977)

"Out on the hustings Mr Fraser has attacked the Labor proposition to abolish payroll tax. Yet the abolition of payroll tax is $10 a week or $500 a year.

Abolition of the payroll tax will reduce the cost of employing the present workforce by $1700 million a year. This means that employers could boost their employment by up to 150,000 without any increase in their total labor costs.

Alternatively, if the whole benefit was passed on in terms of lower prices the Consumer Price Index would fall by 2 per cent. "

(The Age Melbourne, 6 December 1977)

"According to the transcript, Mr Hawke was asked if the removal of payroll tax was conditional on employers guaranteeing to take on more people.

Mr Hawke replied: "What we are saying is that we would have discussions with premiers and employers to see that they still mean what they have been saying in the past.

"That is, they have said that if payroll tax were abolished they would put on more employees.

"Now, we are assuming they mean what they say. We want to check that and on the assumption that they mean what they've been saying, well, it would be abolished." (The Australian, 1 December 1977)

10 Supplementary Paper No 7

"

Mr Hawke says that if the abolition of payroll tax does not result in more jobs becoming available then Labor would have to look at "an equitable form of income tax reduction".

(The Australian, 1 December 1977)

"Out on the hustings Mr Fraser had attacked the Labor proposition to abolish payroll tax - 'yet the abolition of payroll tax would do exactly what the Government says it wants, reduce labour costs".

"The abolition of payroll tax would reduce the cost of employing the present workforce by $1,700 million a year. This meant that employers could boost their employment by up to 150,000 without any increase in their total labour costs."

(The Canberra Times, 30 November 1977

"A Labor Government would ensure that company revenue resulting from the abolition of payroll tax would be used to create new jobs or to bring down inflation, the ACTU president Hawke said yesterday.

Mr Hawke said a Labor Government would look at alternative ways of boosting employment unless the State governments and major employers co-operated in channelling payroll tax towards creating jobs.

Mr Hawke said the ALP promise to abolish payroll tax was not conditional because the question of industry failing to carry out its part of the bargain was, at this stage, hypothetical.

"We are assuming that the Premiers and industry leaders really mean what they have been saying about payroll tax for many years - that is that the money would be used to boost employment, " Mr Hawke said.

"But if they fail to do it we would have to look at alternative methods of boosting employment by way of equitable income tax deductions."

Mr Hawke denied a claim by the Prime Minister, Mr Fraser that abolition of payroll tax would only boost corporate profits.

"Payroll tax is a tax on labor and its abolition would reduce labor costs.

"It is as much a part of an employer's costs as the wages it is levied on."

Mr Hawke said the abolition of the tax would reduce the cost of employing the present workforce by $1700 million a year.

Supplementary Paper No 7 11

"This

means that employers could boost their employment by up to 150,000 without any increase in their total labor costs," he said.

(The Melbourne Age, 30 November 1977)

PAUL HEATING ON PAYROLL TAX

[Shadow Minister for Minerals and Energy, Mr Paul Keating] "said Labor would solve the immediate problem of unemployment 'by taking at least 150,000 to 200,000 people off the dole queue' with its reduction in payroll tax..."

(The Australian, 6 December 1977)

"Meanwhile Labor front bencher Mr Keating yesterday defended the ALP's proposed payroll tax abolition from charges by the Coaltion parties that this would mean handing money to big companies... 'Our policy (payroll tax abolition) is not a gift. Its removing a disincentive to unemployment...'

Mr Keating said".

(The Age, 6 December 1977)

"With our policies of reduction in payroll tax and increases in public outlay we think we can drop the number of unemployed by 200,000".

(Melbourne Herald, 5 December 1977).

SENATOR JOHN BUTTON ON PAYROLL TAX

"I agree that the unemployment situation is severe. I agree that payroll tax is a burden on employers and employment and is an undesirable tax. It is an issue which should be pursued over time with the Premiers to see whether some solution can be arrived at."

(Hansard, 13 May 1991, p3145)

12 Supplementary Paper No 7

"The future review of Commonwealth-State finances and revenue sharing

provides an opportunity to consider the problems, arising from State input taxes. I propose that we refer the question of payroll tax, for example, to that forum with a strong direction that the Summit believes every effort should be made to reduce or eliminate this tax."

(National Tax Summit, 4 July 1985)

JOHN KERIN ON PAYROLL TAX

"The States could be able to abolish payroll tax as a result of the potential savings and extra taxing powers likely to emerge from the special Premiers' Conference process, federal Treasurer John Kerin said today.

"Mr Kerin told an ALP fundraising breakfast here [Brisbane] that Industry Commission figures showed that reform of the railways alone, which was begun at the July Conference in Sydney, could save the States enough to abolish payroll tax ...

"In answer to a question from the business audience about whether the States should do away with payroll tax, Mr Kerin said it was up to the States to decide how to pass on the benefits of a more efficient system. 'There will be a lot more room to move in some of these areas where quite

clearly we're disadvantaging business,' he said."

(AAP, 27 August 1991)

7.7 AUSTRALIAN DEMOCRATS AND PAYROLL TAX

"The Australian Democrats are working for abolition of Payroll taxes"

(Federal Party, "Give a Damn: Principles for Government", December 1989)

'As a practical incentive to re-employment, payroll tax will be eliminated and we will work for the introduction of a "reverse payroll tax" paying the social welfare benefit for a limited period to a company employing, in a new job, anyone who has been out of work for four weeks or more.

(Western Australia Division, "State Policy Paper on Employment" February 1988)

Supplementary Paper No 7 13

"The Democrats will press the Commonwealth Government to increase the

share of Commonwealth funding to NSW, and to establish a more equitable taxation system. This would in part offset the eventual abolition of payroll tax."

(NSW Division, "Policies for a Better NSW', 1991)

"Payroll tax will be phased out and replaced with a land value tax based on unimproved land value. Initially such a tax shall not apply to a family home or farm."

(Federal Party "The Sustainable Economy", January 1990).

"We will abolish Payroll tax."

(ACT Division, "Vision for Canberra '^ 1989)

"The Democrats propose the abolition of payroll tax for the under 25's as the first step towards total abolition."

(Victorian Division, 'Your voice for a Fair Go" September 1988)

"At State level, the Australian Democrats will seek to abolish payroll tax for employees under the age of 25 years, as a first step in complete abolition of that form of taxation."

(South Australian Division, "State Policies for South Australia'; 1988)

7.8 ALP PAYROLL TAX POLICY 1977

"We now make a proposal which calls for a national effort of co-operation, on the part of all governments, Federal and State, employers and taxpayers. We propose that employers should no longer be penalised for providing jobs. In this way, business can be galvanised, jobs created - and

inflation brought down."

(ALP Policy Speech, IY' November 1977)

14 Supplementary Paper No 7

"

We shall seek to end the tax on jobs - the payroll tax. It discourages employers from engaging more staff. It raises the cost to employers of each employee by an average of $10 a week. It stops people getting jobs. It increases prices."

(ALP Policy Speech, 17 November 1977)

"Our proposal would directly and immediately relieve the private sector of one of its greatest burdens, give a boost to jobs and help business cut costs."

(ALP Policy Speech, 17 November 1977)

"And for its full success, it requires an act of national co-operation. Freed of the burden of the payroll tax, with its added labour costs, employers would have the incentive not only to employ more labour, but to hold prices down. Given good faith on the part of business, the abolition of the payroll tax can mean the end of the slide towards massive unemployment and a reduction in the Consumer Price Index of up to 2 per cent a year. At one

blow, we can cut the upwards prices spiral and the downwards jobless spiral." (ALP Policy Speech, 17 November 1977)

7.9 STATE LABOR PREMIERS AND SENIOR COLLEAGUES ON PAYROLL TAX

BOB CARR ON PAYROLL TAX

"We will review the proposed abolition of stamp duty on shares ... If there is any tax relief the priority must be payroll tax."

(Budget Reply Speech, 26 September 1991)

JOAN KIRNER ON PAYROLL TAX

"I find it interesting that some of the proponents of the tax argue that it is a better tax than payroll tax. I think what we have to say is that both those taxes are regressive and in fact payroll tax needs reconsideration in the total debate about tax that the Prime Minister is encouraging at special Premiers' Conference. "

(ALP Centenary Conference, Hobart, 25 June 1991)

Supplementary Paper No 7 15

"A payroll

tax is a tax on jobs."

(Radio 3LO, 12 November 1991)

What does all this discussion (on Commonwealth-State financial relations) mean to business in the States; to community in the States?'

What it means is that for the first time the States would have access to a growth tax, which would allow us to reorganise some of our less progressive taxes, like payroll tax, and in fact be accountable, with the Commonwealth, for any growth. I think that's a much better system.

(10 November 1991, Sunday Program Interview)

KEITH DE LACY, QLD TREASURER, ON PAYROLL TAX

"Honourable Members should remember that payroll tax is a tax on wages, and a savage one at that. Payroll tax is a tax on employment - a very savage tax- that has escalated rapidly and has become the major form of taxation revenue for the Government of Queensland. "

(Hansard, 15 November 1988, p2544)

TOM BURNS, DEPUTY PREMIER OF QUEENSLAND, ON PAYROLL TAX

"It is absolutely incredible that any Government would allow payroll tax to become its major source of revenue."

(Hansard, 17 September 1986, p1538)

"That is a tax on wages, and a savage one, too. It is also a tax on employment and, again, a very savage tax. As a tax on employment, payroll tax has escalated rapidly and has become the major form of taxation revenue for this Government."

(Hansard, 17 September 1986, p1538)

16 Supplementary Paper No 7

NEVILLE WARBURTON, QUEENSLAND MINISTER FOR

EMPLOYMENT, TRAINING AND INDUSTRIAL RELATIONS, ON PAYROLL TAX

"Anyone who has any interest in the application of this very lucrative form of State taxation knows that payroll tax is a tax on employment. It is a disincentive to the employment of additional labour. Payroll tax is widely criticised because it encourages capital labour substitution. In other words,

wherever possible, firms - and one cannot blame them for it - will seek to introduce labour-saving techniques and technology because they are taxed not on the capital that they employ but only on the labour that they employ."

(Hansard, 3 December 1985, p3092)

"Payroll tax contributes to the high level of unemployment in this State and provides a powerful disincentive for employers to take on additional staff, particularly apprentices.

(Hansard, 3 December 1985, p3092)

"It is about time that the Queensland Government took a similar initiative and reduced the level of payroll tax."

(Hansard, 3 December 1985, p3093)

"Last year, I raised the plight of cane-growers in respect of payroll tax ...

I fully realise that most of the growers would not pay payroll tax, but the mills certainly do, as do the companies that depend upon and supply the sugar industry. They pay pretty heavy payroll tax. A quick survey of the sugar-mills and some of the more notable companies that service the sugar industry would confirm that statement."

(Hansard, 3 December 1985, p3093-3094)

JOHN BANNON ON PAYROLL TAX

"The Opposition Leader, Mr Bannon, is ready to lead a national campaign to abolish payroll tax. He said the tax must go but an alternative revenue had to be found first. " (News, 21 January 1980)

Supplementary Paper No 7 17

"In his

famous eighteenth century dictionary, Dr Johnson defined an excise as a hateful tax. I think that that definition of an excise well applies to the definition of pay-roll tax, the subject of the Bill which we are considering. It is a hateful tax, and particularly so at a time when employment opportunities are shrinking and when we have record levels of

unemployment in this State and in Australia generally. Any tax which provides a positive incentive to an employer not to take on extra staff works against the economic cycle and against employment."

(Hansard, 3 December 1980, p2563)

"Our Party is strongly opposed to pay-roll tax. We believe it is an inequitable tax..." (Hansard, 3 December 1980, p2563)

"At the State level, since being in Opposition, I have repeatedly called for a national conference to attempt to find some way of replacing pay-roll tax with a more equitable tax."

(Hansard, 3 December 1980, p2563)

"In view of the South Australian Government the major priority in business taxation reform should be the serious examination of viable options to significantly reduce or phase out payroll tax. "

(National Tax Summit, 4 July 1985)

"...I appreciated the new-found candour of the Leader [of the Opposition], with his acknowledgment of the importance of the [payroll] tax and the difficulty of any State unilaterally abolishing it..."

(Hansard, 4 October 1988, p800)

"We must not be persuaded to take the easy course and revert to the cosmetic tinkering we have seen so often in the past. We will have failed this and future generations if we surrender tax reform piece by piece to the pressures of narrow interests."

(National Tax Summit, 1 July 1985)

18 Supplementary Paper No 7

"From the discussions I have held with employer groups and union

representatives in my own State and from things that have been said today, it is quite clear that of all those areas of State taxation, payroll tax is of most concern. It is important for sustained economic recovery that there be some consideration of payroll tax at this Summit. In our view the major priority in business taxation reform should be the serious examination of viable options to significantly reduce or phase out, payroll tax.

The arguments against payroll tax are widely acknowledged. A recently published paper attempted to minimise the employment disincentive impact of payroll tax but the fact is that it is an on-cost to employment. Because of the way it operates at particular levels and on particular scales it can

make a marginal difference between employing or not employing extra persons. It can mean finding alternatives to employing people. As such it works against employment.

Equally, the impact in terms of rendering our manufactures less competitive in international markets should not be overlooked either. The fact is that most of our trading partners who perhaps are subject to consumption taxes or taxes of this kind are not vulnerable in international

markets because these taxes are not levied on them in their trading activities. Our goods go to the international markets with the payroll tax on-cost already there and thus that tax reduces our competitiveness. So that is another reason why that tax should be looked at directly.

It is not a tax that the States are levying by choice; it was transferred to the States in the early 1970s as a growth tax, as a means of raising revenue and expanding the very narrow State tax base. Unemployment was low; had been historically low in post-war years. The economy was in a growth phase. The economic situation is now radically different and it is time for

a fundamental re-examination of that earlier decision and a reduction of our dependence on that tax."

(National Tax Summit, 1 July 1985)

"I do regret, as I have already said in this forum, the fact that the State taxation system and its impact and the need for reform there, has been dismissed effectively from the this forum and indeed was barely mentioned in the White Paper. I think that is a major deficiency and means that

whatever we resolve at the end of this week we will still have some large unanswered questions and difficulties which we have not really touched on.

(National Tax . Summit, ,4. July 1985)

Supplementary Paper No 7 19

"I would like to turn to the specific question of payroll tax. Let me briefly

restate the objections to that tax. We can identify six immediately. Firstly, it is a tax on employment, a disincentive to employ at the margin and therefore a block i employment growth. I suggest that whatever academic study is made of the impact of this - we have had one or two quoted in the last few days - it is nonetheless a practical factor that an employer in contemplating an extension of his or her business must look at the on-costs involved and play off between putting further capital investment in, replacing labour with machinery or, alternatively, employing extra persons. Payroll tax obviously has an effect on that decision. It is not an academic argument. Payroll tax does have an effect at that marginal stage where to employ more persons pushes a business or company into a higher bracket of payroll tax."

(National Tax Summit, 4 July 1985)

"Secondly, payroll tax is inequitable as between businesses. It discriminates against labour intensive industry and in favour of capital intensive industry. As such it is not equitable and I would suggest in some senses works against a public employment policy which we all would endorse. "

(National Tax Summit, 4 July 1985)

"Thirdly, it does not recognise capacity to pay. It is not related to the performance of a business; it is simply based on the turnover of a business and its relationship with employment.

(National Tax Summit, 4 July 1985)

"Fourthly, because of the way in which the payroll tax system is applied, we have differences between regions and between small and large businesses which again do not relate to the question of their profitability or their performance. In other words one could see a large labour intensive metropolitan employer paying payroll tax off a very low profit margin and one could see a regionally based, smaller and capital intensive employer paying nothing and yet having a very much large profit base."

(National Tax Summit, 4 July 1985)

"Fifthly, payroll tax raises the cost of exports. Because that cost is built in and cannot, like some of the taxes of our competitors, be discounted when one goes to the international markets, payroll tax obviously has a detrimental effect on our competiveness."

(National Tax Summit, 4 July 1985)

20 Supplementary Paper No 7

"Sixthly, I think it is worth mentioning that it is a hidden cost. By and

large, when payroll tax rates are changed adversely, and there has been the case where two States at least have applied a one per cent surcharge to the general rate of payroll tax, and while there is, of course, an outcry from business and those businesses affected, it does not affect the public at large

or most of the key pressure groups. If we are to do something about payroll tax one of the things we should do is bring it forward into greater prominence in the interests of an honest system of taxation."

(National Tax Summit, 4 July 1985)

"So, in times of economic recession in particular, the demands for State services and therefore the demands on State revenue certainly increase greatly. It is facile to say that we can eradicate payroll tax by major cuts in State expenses. "

(National Tax Summit, 4 July 1985)

CARMEN LAWRENCE ON PAYROLL TAX

"The present process condemns State governments to the narrow, inefficient, regressive and unstable tax regimes which they operate today. I am sure you would join me in regarding as bizarre the imposition of payroll tax, particularly in the present economic climate. How can anyone justify the

States depending on what is effectively a tax on employment as a major instrument for raising revenue?"

(Speech to Australian Mining Industry, 2 May 1991)

"It doesn't matter how profitable the business, it simply relates to the number of people that you employ."

(29 July 1991, Sunday Program)

Supplementary Paper No 7 21

SUPPLEMENTARY PAPER NO 8

WHY PETROLEUM PRODUCTS EXCISE SHOULD BE ABOLISHED

8.1 INTRODUCTION

Australia is a huge country comprising a land area of some 7.7 million square kilometres.

The distance between the most northerly point (Cape York) and southerly point on the mainland (Wilson's Promontory) is about 3,180 kilometres. From east (Cape Byron) to west (Steep Point) the distance is around 4,000 kilometres.

Excluding the USSR, Australia's land area is about 50 per cent greater than that of Europe and is 32 times greater than the United Kingdom.

With those geographical dimensions it is critical Australia has an efficient and fairly taxed transport sector.

If Australia is to compete effectively on world markets it must not only deal sensibly with the "tyranny of distance" between us and our overseas markets. It must also deal sensibly with our very own domestic "tyranny of distance".

For that reason, the Coalition parties have decided to totally abolish all Federal excises on refined petroleum products.

As a result of our announced reform, businesses will see a total reduction in fuel taxation of around 26 cents per litre, while consumers will receive a fuel taxation cut of 19 cents per litre.

This is a massive taxation reform and will contribute to a $3 billion reduction in the taxation of business inputs and relieve the taxation of exports.

Private consumers will pay Goods and Services Tax on refined petroleum products accounting for around 7 cents per litre on motor spirit.

Business, however, will be able to claim a Goods and Services Tax rebate for any Goods and Services Tax paid on that component of fuel used in their production of goods and services. Of course, farmers will not pay excise on petrol or diesel for off- or on-farm use. Additionally they will receive the Goods and Services Tax

rebate if consumption is for business purposes.

Supplementary Paper No 8 1

The Coalition believes that this policy will greatly boost Australia's production

potential and facilitate a fairer distribution of taxation across the community.

8.2 PRICE IMPACT

The following tables set out the impact of the abolition of excise on motor spirit, diesel, aviation gas, kerosene etc, according to the STATAX model.

TABLE 8.1

MOTOR SPIRIT (a)

Final Consumers (cents/litre)

Business users (cents/litre)

1. Present excise duty 25.8 25.8

revenue/litre

2. Proposed excise duty 0 0

revenue/litre

3. GST on motor spirit 7.0 0 (c)

(b)

4. Total indirect tax 7.0 0

post-GST (2+3)

-18.8 -25.8

5. Net Federal tax change (4-1)

(a) These examples assume constant percentage mark-ups from one production stage to the next. (b) Assume initial retail price 67.5 cents/litre and falls by 20.6 per cent to 53.6 cents/litre. (c) GST paid on business inputs is 100 per cent refundable to the business user: in effect, tax

is passed on to the final domestic consumer.

2 Supplementary Paper No 8

TABLE 8.2

DIESEL

Consumers (cents/litre)

Farming (cents/litre)

Mining (cents/litre) Other Bus. (cents/litre)

1. Present 25.8 25.8 25.8 25.8

duty

2. Excise 0 25.8 23.4 0

rebate

3. Net . duty 25.8 0 2.4 .25.8

(1-2)

4.Proposed 0 0 0 0

duty

5. Excise 0 0 0 0

rebate

0 0 0

6. Net duty 0

(4-5)

7. GST (b) 6.6 0 (c) 0 (c) 0 (c)

8. Total 6.6 0 0 0

proposed tax (6+7)

9. Federal -19.2 0 -2.4 -25.8

tax change (8-3)

(a) These examples assume constant percentage mark-ups from one production stage to the next. (b) Assumes initial retail price for diesel is 63.5 cents/litre and falls by 20.6 per cent to 50.4 cents/litre. (c) GST paid on business inputs is 100 per cent refundable to the business user.

Supplementary Paper No 8 3

TABLE 8.3

AVIATION GAS

Final Consumers (cents/ litre)

Business Users (cents/ litre)

Present excise duty revenue/litre 27.1 27.1

Proposed excise duty revenue/litre 0 0

GST on avgas (b) 8.1 0(c)

Total indirect tax post-GST (2+3) 8.1 0

Net Federal tax change (4-1) -19.0 -27.1

(a) These examples assume constant percentage mark-ups from one production stage to the next. (b) Assumes present retail price is 78 cents/litre and falls 20.6 per cent to 61.9 cents/litre. (c) GST paid on business inputs is 100 per cent refundable to the business user.

TABLE 8.4

KEROSENES, FUEL OIL AND HEATING OIL (a)

Final Consumers (cents/litre)

Business Users (cents/litre)

1. Present excise duty revenue/litre 5.3 5.3

2. Proposed excise duty revenue/litre 0 0

3. GST (b) 8.2 0 (c)

4. Total indirect tax post-GST (2+3) 8.2 0

5. Net Federal tax change (4-1) +2.9 -5.3

(a) These examples assume constant percentage mark-ups form one production stage to the next. (b) Assumes post-GST retail price of 67 cents/litre falls to 63 cents/litre. This is an assumption, rather than a STATAX model result (c) GST paid on business inputs is 100 per cent refundable to the business user.

4 Supplementary Paper No 8

a

Of course, the results in these tables (as set out above) depend critically upon the assumptions made about the mark-ups adopted . throughout the production/distribution chain. As in the Government's Draft White Paper, for these tables we have assumed that retail and wholesale mark-ups remain constant in percentage terms (Draft White Paper, pp 138-9, paragraph 1307).

Other assumptions are possible. The Coalition has therefore also sought some industry calculations of the effect of the package.

The following industry estimates of the impact of excise abolition on motor spirit have been calculated on the Sydney and Melbourne November 1991 price of 68.00 cents and 67.6 cents per litre respectively.

TABLE 8.5

OIL INDUSTRY ESTIMATES

100% Excise Reduction Sydney Melbourne

Retail Price 68.00 67.60

less excise 25.77 25.77

Net 42.23 41.83

Business Price 42.23 41.83

Consumer Price

+ 15% GST 6.33 6.27

TOTAL 48.56 48.10

The remainder of this paper sets out the detailed case for reducing the taxation of petroleum products.

8.3 WHY REDUCE TAX ON PETROL?

In 1986 the then Industries Assistance Commission (now the Industry Commission) came to the view that, in the case of petroleum products:

• rates of petroleum product excise are too high;

• a strong case can be made for exempting the intermediate use of petroleum products from excise; and

Supplementary Paper No 8 5

•

a broadening of the commodity tax base by introduction of a value added tax would be expected to have a number of benefits (IAC, Certain Petroleum Products - Taxation Measures, Report No 397).

In Australia, there are two main taxation regimes imposed on petroleum products.

The taxation of crude oil is effectively the taxation of the profits of oil producers -by reducing the return to the producer from any given gap between the cost of production and the market price - and does not affect the price of refined product to consumers. The higher the price of crude oil on international markets, the greater the return to the Commonwealth in the form of crude oil excise collections.

By contrast, the petroleum product excise - which is levied on refined petroleum products at a specific rate per litre, indexed twice yearly to the CPI - is passed on in the form of higher input costs and higher prices to consumers.

The level at which the Commonwealth sets the petroleum product excise need bear no relationship to the market price.

During 1986, the Government replaced crude oil levy revenue lost due to the falling world price of crude oil with increased petroleum product excises. This had the effect of increasing dramatically the ad valorem equivalent of the petroleum product excise from 20 per cent to a peak of 104 per cent before declining to

70 per cent by September 1986 (see Chart 8.1).

The swing in the relative dependence on petroleum product excises and away from the crude oil levy that occurred in 1986 has been largely maintained since then. Chart 8.2 shows the ad valorem equivalent of the petroleum product excise over the last couple of decades and Chart 8.3 shows revenue collections by the

Commonwealth from the crude oil levy and the petroleum product excise.

6 Supplementary Paper No 8

0

CHART 8.1

AD VALOREM EQUIVALENT RATE OF TAXATION - AUTOMOTIVE GASOLINE, 1 JANUARY 1986-13 SEPTEMBER 1986 (PER CENT)

AD VALOREM EQUIVALENT RATE OF TAX PETROL - 1 JANUARY TO 13 SEPTEMBER 1986

120 EQUIVALENT RATE OF TAX (%)

100

80

60

40

20

0 50 100 150 200

DAYS

Source; IAC Report No. 397

Supplementary Paper No 8 7

CHART 8.2

AD VALOREM EQUIVALENT RATE OF TAXATION - AUTOMOTIVE GASOLINE, 1972-1991 (PER CENT)

AD VALOREM EQUIVALENT RATE OF TAX

PETROL - 1972 TO 1991

EQUIVALENT RATE OF TAX (%) 100 -

80

60

40

20

0 1972 1977 1982 1987 1992

Source: 1AC Report No. 397

8 Supplementary Paper No 8

7

6

5

4

3

2

1

0

CHART 8.3

COMMONWEALTH COLLECTIONS FROM CRUDE OIL LEVY AND PETROLEUM PRODUCT EXCISE

CRUDE OIL AND PETROLEUM PRODUCTS

COMMONWEALTH EXCISE COLLECTIONS

8 BILLIONS 8 1

83/8 . 1 11•1 /R 85/8(i 110/117 8 •/88 fill /89 1^4)/S).C)

E "i CRUDE OIL & LPG = PETROLEUM PRODUCTS

Source: Budget Paper No. 1, various issues.

The shift away from the taxation of crude oil to the petroleum product excise is of significance in terms of the allocation of resources within the Australian economy. By its nature, according to the IAC, the crude oil levy:

" ... is a relatively non-distortive form of taxation as the returns taxed are profits in excess of those necessary to call forth supply and therefore production decisions are unaffected. In addition the [levy] is designed not to raise the price of crude oil inputs to refineries and to leave prices faced by

consumers of petroleum products unaffected. ... (Report No 397, p35)

By contrast, the petroleum product excise directly affects the prices paid for petroleum for use as inputs by industry and by consumers. On the IAC's analysis by switching relative reliance from the crude oil excise to the petroleum product excise, the Commonwealth has shifted from a non-distorting source of revenue to

a distorting source of revenue.

The extent to which the petroleum product excise is likely to distort consumption and production decisions is, in part, dependent on the extent to which petroleum is consumed directly by the public and the extent to which it is used as an input into industry.

Supplementary Paper No 8 9

About 55 per cent of revenue raised in 1990-91 from the excise on petroleum

products and customs duty on petroleum products is from the taxation of products used as intermediate inputs into the production of other goods and services, with only 45 per cent paid by final consumers on their consumption of petroleum

products.

From the examination of similar data in 1986, the IAC concluded that:

... It is clear that a significant proportion of existing excises fall on intermediate or business use. It is a general principle of taxation that taxation of intermediate goods has costs that can be avoided...." (Report No 397, p124). I

The IAC identified three difficulties with taxes on intermediate products such as

petroleum products:

"they tend to penalise production of goods which are intensive in their use of petroleum where the higher costs can not be passed on to consumers;

"for those goods where higher costs can be passed on to customers, patterns of end consumption of those goods will be distorted; and

"they distort the input mix of industry by encouraging the substitution of other inputs for petroleum." (Report No 397, p124)

Distortions arise because of the wide variation among the rates of tax on sources of energy that are relatively close substitutes. Diesel and petrol are taxed at ad valorem equivalent rates of 80 per cent, compared with lighter rates of tax on a range of other petroleum products while LPG, coal and electricity are not taxed

at all.

The IAC considered the types of distortions produced by petroleum taxation arrangements, including the following:

the weight of evidence from published econometric studies is that the demand responsiveness of individual petroleum products (at the aggregate level) to changes in price is relatively low but there can be quite a variation between particular industrial and consumer applications of different petroleum products due to price changes. As regards the elasticity of

demand (ie the responsiveness of demand to price changes), the IAC concluded:

10 Supplementary Paper No 8

" ... the distortive effect

of high taxes can be significant over time.

While [this effect], may be minor at low rates of tax, the excise, rates now in existence for petrol and diesel are in the order of 70 per cent. If these levels are sustained there will ultimately be at least some impact on a range of economic decisions. The Commission does not consider that it is possible to simply ignore these effects by arguing that the elasticity (ie the responsiveness of demand to price changes) of demand for fuel is low ..

(Report No 397,. p122);

the econometric evidence shows that substitution prospects between certain petroleum products and other non-petroleum energy types like electricity, coal and gas are not low. On this point the IAC concluded:

"The taxation of petroleum products is, therefore, likely to have significantly affected the allocation of resources between petroleum products and their non petroleum energy substitutes" (Report No 397, p6);

in relation to specific examples of distortions the IAC concluded:

it is difficult to accept that it is desirable to provide such a large incentive for the conversion of vehicles to run on LPG" (Report No 397 p122);

"...a whole range of similar incentives can be identified, particularly in choice of industrial fuel use" (Report No 397, p122);

on the important issue of distortions due to input taxation the IAC concluded:

"Heavy taxation of intermediate inputs would, over the economy as a whole, be likely to produce an industry structure less efficient than it otherwise would have been". (Report No 397, p124)"

As noted earlier, these considerations led the Commission to conclude that:

• the rate of taxation of petroleum products was too high;

• the intermediate use of petroleum products should be exempt from revenue-raising taxation; and

• the distortions in consumption and production from the need to raise tax revenue should be minimised by minimising differences in tax rates.

Supplementary Paper No 8 11

The

Commission examined various options for solving these problems, while continuing to collect the same overall amount of revenue from petroleum products. It found that significant improvements to the taxation of petroleum products were dependent on reducing the revenue target for petroleum products and instead raising revenue over a wider base.

The Commission noted the defects with the income tax and wholesale sales tax systems in terms of their ability to penalise specific activities and distort patterns of consumption and concluded:

"Given the desire to reduce dependence on petroleum excises it is difficult to justify easing the load on current tax instruments". (Report No 397, p146)"

By a process of elimination, and notwithstanding the rejection of the consumption tax by the Tax Summit in the previous year, the Commission came to the view that a broad-based consumption tax (BBCT), preferably a VAT, in substitution for a large part of the excise on petroleum products

" ... has to be considered when reviewing taxes on petroleum products ... the adverse effects of heavy reliance on petroleum, taxes are an important additional consideration [in any decision to introduce a consumption tax).

(Report No 397, p xxiii)"

8.4 THE ENVIRONMENT

Against these arguments, it should be noted that some advocate high taxes on petroleum products for conservation reasons (i.e., to discourage use of a depletable resource and to reduce the production of "greenhouse gases").

For example, the Minister for the Environment, Mrs Ros Kelly, is on the record for raising the issue of increasing the cost of fuel to the average motorist. On 20 November 1990 Mrs Kelly was quoted as saying that "petrol was too cheap" and that "carbon-based petrol should be more expensive to force drivers to use less or

switch to more environmentally friendly fuels" (Sun News Pictorial, 20 November 1990).

However, it is by no means self-evident that higher taxation of petroleum products is the solution to cutting down greenhouse gas emissions. As the Commonwealth Treasury noted in its paper "Developing Government Policy Responses ; to the

Threat of the Greenhouse Effect" - Treasury Economic Round-Up, November 1989:

12 Supplementary Paper No 8

"Transportation is an area where distortions may also contribute to

excessive emissions. For example, inefficiencies in coastal shipping and the waterfront have contributed to the transfer of freight away from shipping on to land transport. In addition, subsidies to railways and under-recovery of heavy vehicle road use costs impact on fuel

usage but the net effect is unclear. Rail is more fuel efficient than road transport but the effect of heavy vehicle undercharging and rail service inefficiencies in shifting freight from rail to road is offset by the effect of rail subsidies and regulations in some States restricting

road transport of some commodities. Given the significant contribution of transportation to greenhouse gases, closer examination of this question would be worthwhile." (p17)

While it is acknowledged that heavy taxation can obviously affect the usage of any particular product it may not be the most efficient way to deal with the pollution problems that are being faced. As the IAC has noted:

"While petroleum taxes might be consistent with a very loose interpretation of the polluter pays principle, they are unlikely to work very well as a means of making each polluter face the costs of the pollution associated with his consumption of these products"

(Report number. 397, p81)

The Commission went on to note that:

"A variety of measures aimed at controlling pollution have been introduced in Australia: by and large the emphasis appears to be on regulatory mechanisms such as emission controls and design standards.

(Report number 397, p81)

Indeed the Commission concluded:

"that while it cannot rule out the possibility that such taxes may have some beneficial effect on pollution levels, controlling pollution is not a primary objective to be pursued by taxation of petroleum products."

(Report number 397, p82)

and:

"...energy conservation is not a rationale which should influence an assessment of petroleum product taxes." (Report number 397, p84)

Supplementary Paper No 8 13

As the Commonwealth Treasury strongly argued:

"Australian industries compete in a global marketplace. In deciding what measures we should take ourselves, we need to recognise that opportunities may exist to circumvent their intent by substituting overseas-sourced goods for Australian goods. Policies which could be

worthwhile if part of global action could be harmful if taken unilaterally. For instance, unilateral action to restrict energy use or raise energy costs may force energy intensive industries offshore to countries not imposing such measures, with no net reduction in greenhouse gas emissions but a cost to Australia in terms of lost trade

opportunities, income foregone, lower employment, etc. "

(Economic Round -up, November 1989, p7)

The Coalition is particularly aware of community concerns about the environment.

Particular attention will be paid to the steps which Australia can take to ameliorate the worldwide impact of the greenhouse effect. These include a targeted reduction of 20 per cent in greenhouse gas emissions by the year 2000 and giving particular attention to the continued monitoring of Australian Design Rules covering levels of permissible emissions for motor vehicles. Specific programs will aim at identifying and reducing sources of acid rain before this becomes a major problem for our region.

Investigations will be pursued into the practical alternatives which exist to the continued burning of fossil fuels and their replacement by other economically viable energy sources. We believe that there is great scope for saving in energy consumption by increasing our efficient products and procedures and individuals

should be encouraged to play their part in relation to their domestic activities.

8.5 NATIONAL ROAD FUNDING POLICY

For too many years road users in Australia have been slugged by fuel excises, State franchise fees, registration charges, sales taxes and stamp duties. In 1987-88 revenue collected by governments from road users by these various taxes exceeded government expenditure on roads by $2.6 billion.

Our tax reform measures ensure that road users are not treated as a source of general revenue raising. The abolition of the excise and its funding by the Goods and Services Tax ensures that fuel - the most pervasive of all business inputs - is not subject to an input tax. In addition, the sales tax on transport equipment also will be abolished. In a large transport dependent country like Australia, the

abolition of these taxes means that business can make its production and distribution decisions purely on the basis of resource costs, unalloyed by taxation considerations, including by the Goods and Services Tax since businesses will receive a rebate on Goods and Services Tax paid on their use of fuel.

14 Supplementary Paper No 8

Under the new Coalition Government road users will no longer be treated as a

milch cow to fund government expenditures in areas outside roads. Equally, it would be irresponsible to allow road users to have a free ride at the expense of the general taxpayer by funding road expenditure entirely from general revenue. The tax/expenditure package has been costed on the basis that, in effect, road expenditure by the Commonwealth (of approximately $1200 million per annum) is funded from general revenue. The user pays approach to the provision of public infrastructure is however important in achieving a rational approach to microeconomic reform. A key part of that reform process is getting the price

signals right for transport. Fully funding road costs out of general revenue does not achieve that objective.

At the present time the Federal Government and the States are in this process of negotiating a new approach to road funding. These negotiations are however hampered by the Commonwealth reliance on fuel excises as a. source of general revenue. At the time of developing this proposal the final nature and design of the new arrangements is unknown. The Coalition therefore is not now in a position to assess the adequacy or otherwise of the new road user changes that are expected to be implemented next year or beyond.

The incoming Coalition Government, therefore, will request the newly established National Road Transport Commission to review the national system of road user charges to apply following the implementation of our tax reform package. The Commission would be guided by the need for the system of road user charges to

be equitable, efficient and simple to administer. The Commission would be free to recommend that charges take any form or combination of forms.

These changes to the arrangements for road funding will ensure that all revenue raised by user charges will be spent on road maintenance and construction. The overall level of road user charges and road expenditures will be the responsibility of the National Road Transport Commission. Charges and taxes on road users

and the level of expenditure on roads will no longer be subject to the vagaries of budget processes which have produced wild fluctuations in rates of charge and levels of expenditure in past years.

The funding of road expenditure by road user charges has the potential to improve the budgetary position of the Commonwealth and to this extent the fully funded proposal contained in this package is very conservative.

8.6 CONCLUSION

Our policy of abolishing The Federal petroleum products excise will create a fairer and more equitable Australia.

Our policy will result in a substantial fall in the prices of most basic items. As transport costs fall so will the price of the items transported. All goods on the supermarket shelves will cost less than they would otherwise have done.

Supplementary Paper No 8 15

Australia is a big country of long distances and is particularly burdened by heavy

taxation of fuel. The Liberal and National Parties' policy will mean cheaper goods and services. It will also mean more efficient industries that can effectively compete on world markets - AND THAT MEANS JOBS.

16 Supplementary Paper No 8

9.1 HAWKE ON TAX REFORM

1984 Election Campaign Policy Speech (November 1984)

Towards these great goals, we now set these priorities for our next term: ... A genuine reform of the Australian tax system to promote growth and to ensure that the benefits of that growth are fairly shared and bring lasting relief on personal income taxes to the millions of ordinary Australian taxpayers.

(In detailed section on tax reform)

... The second major challenge for our next term of office is reform and a complete overhaul of our tax system. That will be of fundamental importance to the task of national reconstruction.

A thoroughgoing review and reform of the entire tax system will be central to all our tasks in our second term.

Mining Industry Council Speech (2 May 1985)

Anyworthwhile tax reform must be based on three key objectives. First, a reduction` of avoidance and evasion. Otherwise tax reform can only redistribute a disproportionately high tax burden among existing tax payers.

Second, reform should seek a reduction in the marginal tax" rates:' there can be no doubt as to the disincentive effect of high rates on incremental work effort.

And third, we must seek to ameliorate poverty traps wherever possible.

Supplementary Paper No 9 1,

Sunday Program Interview

(2 June 1985)

(On Tax Reform)

It has been quite clear from the very beginning that if you move to a new system which has a broad based consumption tax element in it then prima facie that can be regressive. It can hurt people on lower incomes, and social welfare beneficiaries.

So we've had to look at the compensatory mechanism that you can put in and try and guarantee your satisfaction that those people are going to be looked after. Now I've had to make sure in my mind as the process gone on that, that can be achieved. I believe it can.

... unless there is a source of income in the consumption area, then the mass of Australians - the ordinary taxpayers - are not going to be able to get the substantial cuts in personal direct taxes to which they are entitled.

Because you can't have a situation, I believe, where your ordinary taxpayers are just getting into the situation of paying half their income in taxes....

(On Capital Gains Tax)

... The last thing in the world that this Government is going to do is to contemplate the bringing in of a tax reform with an element which is going to have adverse impact upon economic growth. We simply wouldn't do it.

(On Consumption. Tax)

Question: Aren't you taking a heck of a risk.. (in advocating the adoption of a consumption tax), and is it worth it?

Hawke: Yes, we are taking a risk. ... What this country has needed desperately for years now is a government which is prepared to face up to what has to be done to get this economy in proper shape....

Question: But if you do this and then lose the election, they're (the Opposition) the ones who benefit.

Hawke: ... I'm not in politics and never have been in public life just to be there to ride a popularity wave and do what you think is going to be popular.

What needs to be done is to have a Government in this country which is prepared to face up to the greater challenges facing this country.

2 Supplementary Paper No 9

We are coming to the end of this twentieth century... We cannot any longer

afford to go on, take soft options and say she'll be right mate. The world is not going to say to Australia, she'll be right.

Now if you don't have your tax system, which is an intrinsically important part of seeing that your economy runs efficiently. If you just say, sorry too hard, we won't do it, then perhaps it might be easier politically for us.

... It will be a tragedy for Australia if we baulk at tax reform because it might hurt me here, it might hurt you there. Now for God's sake, let's, as Australians, say what does Australia as a whole, what do our children need in the next generation. Do they want a tax system which has just been slip

shod, mish mashed together over thirty years, with no point or purpose, and which is inefficient?

... you can't have a continuation of a tax system which is haemorrhaging, imposing burdens on those least able to bear them, economically inefficient.

...if Australia refuses to face up to this issue, we'll slop through ... we'll slop through. Our children will pay an enormous price if through our self-indulgence and self-interest we refuse to remedy this system.

Willesee Program (4 June 1985)

...In broadening the direct tax base, there will be a closing off of a number of shelters which have been used for the purpose of tax avoidance. The closing off of those shelters will mean the end of avoidance in those areas.

The second thing is that if the broad-based consumption tax is brought in, those increasing numbers of people in the community who buy the use of clever lawyers and accountants have avoided the payment of any tax on their income and also in the absence of a consumption tax, aren't paying any tax on the spending of that income. They will be caught up there by the twelve and a half per cent consumption tax, they will be paying tax...

One, we will be broadening the direct tax base, removing shelters and so on, so more revenue will be coming in; and secondly, you'll be getting this dividend through the consumption tax from those people who, at the moment, don't pay any tax at all.

... We don't believe businesses will be ruined as a result (on the introduction of a consumption tax). There is no evidence to suggest that they will be.

Supplementary Paper No. 9 3

If you have a tax system which is more economically efficient and if you

increase the amount of money which is going to be available to the ordinary taxpayer, the ones with the highest propensity to consume; they will, in fact, be able to buy more goods and services in real terms.

If the community, as a whole, is put in that position, then in economic terms, the business community will be better off.

... I have faith in the capacity of the Australian community to look at this package as a whole.

... The present tax system is in decay and the process of decay is hurting average Mr and Mrs Australia. The wealthy, rich person who can afford the tax accountant, the tax lawyer to dodge and avoid is the one that's benefited.

Now I believe that ordinary Mr and Mrs Australia wants a fairer system and a more efficient system. I believe that they will respond positively to this proposal.

South Australian ALP Convention (8 June 1985)

We cannot delude ourselves that we can achieve fundamental economic and social reform if we allow ourselves to be continuously saddled with a tax system that is becoming more and more unfair, inequitable and inefficient.

The Australian (8 June 1985)

"Once you find the truth you've got to stick to your guns"; as for those who agonise after that, they are just "wayfarers" for whom he has no time."

"I don't like to be mucked around by people who know the truth of a position and let their prejudices sit in the road... I've got no time for polluted minds, none. Most of the people in this building come here to serve the public honestly and try to form honest views. But there are those with prejudices and they get in the road sometimes. And sometimes, they've got to be knocked out of the road - you can't persuade them."

4 Supplementary Paper No 9

ABC PM Program

(20 June 1985)

(excerpt from "The World Today Program") Question: Why don't you exempt food from the consumption tax?

Hawke: Because all the advice that we have been given from other countries and from independent experts is that there should not be exemptions because once you start having substantial exemption, it means these things:

Firstly, it means that the burden upon those who have to carry the administration of the tax, the retail outlets, they have to have a more complex cash register system and an accounting system.

Secondly, it imposes the inevitable situation upon governments of any complexion that they will be having lobby group pressures upon them to exclude this, to exclude that, to exclude that, you will lead to the situation that you have now in the wholesale tax system which brings in just under five billion dollars now, which is imposed upon some goods, not upon others.

So for reasons of administration and of logic and efficiency, you can't go down the path of substantial exemptions.

... there may be other ways of compensating people in those sorts of circumstances.

... I believe that the ordinary people of Australia, the ordinary men and women of Australia and those dependant upon them, have increasingly been subjected to a position where they are carrying an infinitely greater, more inequitable burden than they should.

Now, if I come to the conclusion that the sort of reform that we're talking about and that it has broad support, is the way to go but that there would be certain interests who would try and use that approach to defeat the Government, then I would still go down that path because I am dedicated,

and the evidence is there that I've been dedicated from day one of government - to make the tough decisions that are necessary to get the Australian economy into the best possible shape.

That's what I believe my obligation is and if, in taking the decisions to achieve that result, I run some political risk, I've said so be it. I repeat that.

Supplementary Paper No 9 5

ABC National News

(20 June 1985)

I'm not going to lead a Government which walks away from issues because there are problems involved in it.

... It (requests for exemptions for people with medical problems) imposes the inevitable situation upon governments on any complexion that they will be having lobby group pressures upon them to exclude this, to exclude that, to exclude that.

... It's conceivable that in some areas of medical, physical disability considerations that - and I'm saying this without commitment- that it's conceivable that you might be able to have such a fence around things like that which made it quite incapable of extension into general areas by way of precedent and that would be worth looking at.

Inaugural Frank Forde Memorial Address "Reform - the Never -ending Challenge" (25 June 1985)

The fact is, that as the system is now operating in Australia, the direct tax system has ceased to be genuinely progressive. It is just not achieving the purposes of equity and justice or efficiency which have been the reasons for Labor's traditional preference.

... the chief losers from the system as it is now operating in its totality are the ordinary working men and women...

Opening Add ress to the National Tax Summit Conference (1 July 1985)

The summit itself was undertaken as a crucial part of the process by which the Australian Labor Government would fulfil the undertaking I gave to the people of Australia in these terms:

A genuine reform of the Australian tax system to promote growth and to ensure that the benefits of that growth are fairly shared and bring lasting relief on personal income taxes to the millions of ordinary Australian taxpayers.

... There is a definite linkage between ensuring continued growth - fairly shared - and tax reform.

6 Supplementary Paper No 9

But let me. at once emphasise this point: we say as a Government that

genuine and lasting tax reform is central to our mandate from the ,people, and that this, summit is an integral part of the process we .undertook to achieve that reform.

Tax reform is central to our commitment to the people because it is central to the economic and social objectives of a Government committed to growth, equity and efficiency.

The overriding consideration and the starting-off point for meaningful, relevant, rational debate here this week and throughout the community in the weeks and months to come, must be a realisation of the dimensions of the problem and a recognition of the consequences of doing nothing.

...It is true that tax avoidance and evasion on the massive scale which was allowed to take root and flourish from the mid-1970's transformed the personal tax, system from a genuinely progressive system to a flagrantly regressive one, as it is exploited by some of the wealthiest and the most privileged sections of the community.

For its part, the Government will continue its attack on tax avoidance and evasion which has become the most regressive aspect of our tax system.

... It (Option C) contains, we believe, the elements required to achieve significant tax reform and the most effective way of achieving a fairer, simpler tax system which contributes to sustained economic growth.

Again, I emphasis the need to examine the proposal as a whole, to see it as a package.

The proposals for broadening the income-tax base and for introducing a broad-based consumption tax cannot be isolated from the substantial reductions in personal taxation they make possible.

Neither of these interdependent proposals can be separated from the compensation provisions which are an equally integral part of the total package.

... our proposals for tax reform are revenue-neutral, although the vast majority to taxpayers would be better off., I cannot stress too strongly that tax reform is not about increasing taxes - certainly not tax reform proposed by this Government.

On the contrary, it is precisely because the present system has allowed governments over the years to increase the tax burden by stealth that reform has become so, urgent.

Supplementary Paper No 9 7

...

We all know that the main reason why tax reform has so long been ignored is that it is hard. But the threatened breakdown in the Australian tax system can be prevented only if we have the courage and confidence to act now.

National Tax Summit (4 July 1985)

It is not possible to say that there is broad community support for what was put as the preferred Government option.

Australian Financial Review (15 August 1985)

It is silly to call our decision a back down and those who do are overlooking the genesis of the whole exercise.

The last of our nine principles of tax reform was that no changes would be introduced without broad community support.

... I must say that the degree of rejection of Option C was something that was a surprise to me, because I think a lot of people were acting against their own best interests.

In net terms the Government would have been worse off under the second proposal.

But during the whole process, the Government did the hard work and pointed out the benefits of our proposals. Unfortunately, as they did not meet with broad community support, we were unable to proceed.

We consistently acted in accordance with our principles on tax reform and to suggest that we backed down at all is absolutely absurd.

... We tried to sell it but couldn't.

9.2 KEATING ON TAX REFORM

New York Business Lunch (April 1985)

Tax reform is not for the faint of heart ..'. the Australian Government intends to reform the tax system. We are under no illusion about the difficulties of this task.

8 Supplementary Paper No 9

Sunday Program

(12 May 1985)

The purpose of tax reform is unambiguously to redistribute the burden of taxes, not to facilitate an increase in that burden.

Tax reform cannot be regarded as optional for Australia. Despite its difficulties, the cost of not beginning a substantial a'reform program are now unacceptably high.

Interview (4 June 1985)

If we don't as a nation adopt this proposal, then you won't see• significant reform in this country in taxation for the balance of this century.

Journalist: "...that means that the value of our savings will be cut by 61/2%, I don't notice any mechanism in the White Paper to compensate us for a 61/2% cut in the value of our savings."

Keating: "Well one has to make a judgement about the level of those savings. Were working on a very modest savings ratio, on average of 6% in the White Paper. Obviously the income stream on those savings would rise, relative to what income stream they would be able to earn today. And the other point is for people who have debts the opposite effect to what you suggest applies. So the Government's view is because there is only a modest change in the value of savings but an increase in the income stream, and an offsetting position with debtors, that change in such that compensations are required."

Journalist: "But you do accept that the value of people's savings will fall by 61/2%"

Keating: "The value of people's savings will not be affected in terms of its earning power, and I think that's the important distinction, that their earning power will increase, and the savings reductions are such that the Government doesn't believe there's a case in compensation"

Journalist: "The purchasing power of your ` savings will be reduced by 61/2%."

Keating: "It has to be looked at in terms of not simply just a reduction in its purchasing power, but also as I say in its earnings potential, and its earnings potential is going to rise"

Supplementary Paper No 9 9

"...and substantial base in consumption to reduce the current over-reliance

on the income base. This would result in a manifestly fairer tax system, and would create the foundations for a more efficient system to promote stronger economic growth and higher living standards..."

"...and we'd use every cent of the proceeds to provide significant tax cuts and to increase benefits..."

The Sydney Morning Herald (5 June 1985)

"Australia faces a clear choice: that it either does something about the high marginal rates impacting on average weekly earnings and finds another base in the tax system or it doesn't."

Speech to the National Press Club (5 June 1985)

The Government wants to grasp the nettle of tax reform because:

it is long overdue; it is urgent; and it is crucial to a continuing improvement in Australia's living standards

Reform must also be seen in the context of the Labour Government's basic objectives of ensuring a better, fairer, and more rewarding future for all Australians.

All of the Government's major policies have been directed to those ends:

reform of the Australian tax system cannot be separated from those basic objectives; nor can those basic objectives any longer be assured without such

reform.

It is now well recognised that the Australian tax system is unfair. It is also widely appreciated that it encourages inefficiency and is extraordinarily complex. Clearly there is a need for action: for reform .

We must stop dealing with symptoms. The tax laws are in need of radical surgery.

... We must commit ourselves to three propositions:

E

10 Supplementary Paper No 9

the tax base must be broadened

The ideals of tax reform require us to commit ourselves to lower marginal tax rates

• ... we should to attempt to use the tax system to solve every problem that looks too difficult to solve in some other way

...There are three main advantages of (consumption) tax:

First, it will allow a more rational indirect tax system than the current anomaly-ridden wholesale tax, which has multiple rates, numerous exemptions, and fails to tax the services sector.

Second, it will enable us to generate tax revenues to provide for a major reduction in the marginal rates of income tax. No other tax has the same potential for this purpose.

Third, it generates tax from those who will continue to evade or avoid income tax. That provides a useful "net dividend" for distribution to the rest of the community.

... The virtually zero exemption, single rate structure of the tax is a crucial design feature. It will assist both administration and compliance.

... For business, this is a simple tax. They will also benefit from no longer carrying the cost of the wholesale tax which they pay and have to finance on their stocks.

... There is no justification for taxing income but not taxing capital gains.

...For. too long the politically unpalatable decisions have been put off in this country because our politicians have not had the strength of purpose to tackle the hard issues.

When it has come to the crunch, short-term political interests have always come first. But I think it is fair to say that, at least to some extent the community as a whole has been prepared to let its politicians get away with that attitude.

... The result has been across a whole range of areas, that Australia's economic performance has been below par. The country has not been working to the peak of its achievable capacity because we, as a community, have not been prepared to let it do so. There is no more glaring example of this that our existing tax system. It is decrepit and in a state of virtual decay.

Supplementary Paper No 9 11

It is supposed to ensure that the tax burden is shared on the basis of

capacity to pay, but it fails hopelessly to do that.

It supposed to ensure that people of similar incomes should be taxed similarly. It fails hopelessly on that score also.

It is supposed to be an effective mechanism through which the community can raise the revenue to provide public services and to assist those that it determines are in need. It fails to do that task effectively.

... Our existing system is a dead-weight to the economy. ... The complexity of the system is notorious.

.. The time has come when something must be done.

...Our existing tax system is unfair - we aim to make it fairer.

... Our existing tax system impairs economic growth - we aim to create a tax system that acts as a stimulus to economic growth.

... Our existing tax system is unfair - we aim to reward incentive.

... we are asking the community to focus on our proposals as a package and its potential for the national benefit.

"Well Paul (Kelly) if the broad thrust of C were to be introduced, if the Government can get to the stage that there's broad community support for C, I would very strongly support full indexation of income tax scales and on that basis it would be, if that were a view the Cabinet were prepared to

accept, that would be of course a fait accompli and would therefore be our policy."

"...I'd be quite prepared to hold that out because I think the worst outcome of this would be to now develop a base in consumption to relieve the problem of tax by stealth and compression of the rates where we've had massive increases in tax without any legislative change..."

... "Well, so far as I'm concerned, my mind is made up about approach C but it's not closed."

"...and I'll be barracking for a broad-based consumption tax at a rate which accesses that income which has been avoided and evaded..."

"I have every confidence that much of this cynicism on taxation that might have developed through years of political buck-passing will give way to a broader appreciation of the need for change, and the honest and earnest -attempt this government is making to bring about that change"

12 Supplementary Paper No 9

"...that to do anything in this country about

. structural change one has to do

it on a basis of consultation."

"The consumption tax has been designed with an awareness of the need to ensure that those who are needy and cannot benefit from income tax cuts will receive full, or more than full, compensation.

That is a prerequisite for this measure. The Government will ensure that it is achieved"

"And, of course, the more general point is not all low income taxpayers are needy. Income splitters, who have low incomes, are not needy."

"Again, people who are relying on other people's incomes which have been improved as a result of these changes would also come into that category and, as I mentioned, students, I mentioned already students outside TEAS dependent on other incomes also enhanced by these measures."

"So that value judgment has to be made as to whether they're needy, and whether we should compensate them. And the value judgement we've made in this respect in terms of the White Paper is that they are not needy and therefore that's why the compensation arrangements have been limited in the way in which they have - when I say limited, they are extensive at 96 per cent - across those in the social security system and those who come into the benefits under the income tax system and who are automatically protected by a lift in the tax-free threshold."

"The increase will be paid before the tax operates and it would be at well over compensation."

The Canberra Times (6 June 1985)

"As far as the outcome is concerned, one has to do what one believes is right in the final analysis and I believe this is right and that's why I` am doing it. If there are any kicks in the backside to take, I'll take them."

"When it comes to the crunch, short-term political interests have always come first. But I think it is fair to say that, at least to some extent, the community as a whole has been prepared to let its politicians get away with that attitude."

Supplementary Paper No 9 13

Speech to Melbourne Age Taxation Symposium

(7 June 1985)

...I believe that it is possible to detect a general under-current of recognition that the draft white paper represents a genuine and forthright attempt by the government to tackle the issue of tax reform.

Moreover, I think ' there is an increasing recognition of the need for a substantial package of reforms as the only way of providing lasting solutions to the serious deficiencies in the tax system.

...All of us, especially those in positions of influence, have I believe, an important duty to ensure that the debate in the lead-up to the taxation summit remains on this higher plane.

... We must all recognise that it would be all too easy in this debate to inflame fears and prejudice. And we should realise that some people will be trying to do just this.

... It would be all too easy to let the discussion collapse to the lowest common denominator. The emotive claim of the screaming headline will always be a strong temptation.

But the question is whether we have, as a nation, the maturity to pursue a dispassionate debate in order to achieve such overdue change.

I have no doubt that, unless this climate is acted upon, tax reform will be thrown back into the too hard basket for another 20 to 30 years at immense cost to the vast majority of Australians.

The cost won't be just the loss of the net tax benefits offered to the majority of Australians by the Government's preferred approach. It goes beyond that to include the major loss in economic performance that will result from the continued distortion of economic decisions produced by a broken down tax

system.'

This is not a one-off cost. It mounts up, year after year, as funds and effort are diverted from the productive effort to the search for tax breaks and tax lurks.

...The present tax system is riddled with ad hoc concessions which destroy investment decisions. Instead of being made on the basis of genuine economic return, investment decisions are often made on the basis of short-run cash flow as determined by the tax law.

...The true entrepreneurs will have little to be concern about with a capital gains tax.

14 Supplementary Paper No 9

...

High marginal tax rates and the taxation by stealth associated with a progressive scale in inflationary circumstances provides one of the major pressures for wage increases in our society. That self-defeating feature of our economic structure must be addressed if we are to expect a sustainable, non-inflationary era of growth to be achieved.

These are the reasons why I am so convinced that the essential requirements of tax reform is to reduce the burden of higher income tax rates.

...Without a consumption tax, the fiscal dividend from avoiders and evaders is zero.

Sunday Program (9 June 1985)

"...we think that it's better to reduce the rate, because if the 60 per cent rate remains, even cutting in half, a lot of the incentive to avoid and minimise will remain..."

"On the other hand, the Prime Minister and I are saying that if we succeed in getting this package into place, we would index the scales so the massive change for higher tax, just politicians sitting down watching inflation, inflate people's incomes into higher brackets, taking more real tax money,

that inflation by stealth would be put ...we'd put an end to it."

"I think it's broadly unfounded, yes. I think tax reform has to be on the agenda, because the very pernicious impact of the 46 per cent rate on middle incomes, lower middle incomes, was avoided..."

"We all use the necessities of life now, but you now buy them out of after-tax income."

"What we're saying is, tax income, in other words, with the tax cuts which the Government would provide, the net tax cuts."

"Most of the things in the thirty-two and a half per cent schedule are today everyday items, such as TV sets, video tape recorders, biros, these sorts of things. And there are very few which are luxuries.. .1 mean, I just don't think we ought to skew the whole tax system around to worry about a couple of items like that."

"So on all of those fronts, we think that we have to make an attack upon the psychology of non-compliance..."

"The great value of a tax of this kind in terms of its efficiency will be its simplicity..."

Supplementary Paper No 9 15

The Adelaide Advertiser

(10 June 1985)

"I think the public understands that they now have to buy all these necessities and they have to buy after they are slugged every week, and if we relieve their tax with large net tax cuts they are better off."

Speech to The Australian Finance Conference (12 June 1985)

Some contributors to the taxation debate have expressed concern that the Government's preferred approach could have adverse effects on inflation and the level of economic activities.

As the minister most directly responsible for the Government's campaign against inflation and unemployment, let me say that if I believed the proposal switch to a consumption tax would have such dire consequences, I would not have a bar of it.

There is also a concern expressed by some that the tax switch will cause a reduction in aggregate demand.

This concern is based on the assumption that individual will save a large part of their income tax cut rather than . using it to maintain their consumption.

Within the total, there will be some redistribution, predominately from people with higher incomes and savings ratios to those on lower and middle incomes who spend much more, or all, of what they receive.

Against this background, I think it is clear that the doomsday projections of a collapse of consumer demand have little credibility.

Interview with AAP 13 June 1985

(On exemption of food and clothing): At the moment we all have to buy the necessities; if you're not buying them you can't live. And you buy them now out of your after-tax income, after it has suffered these very high, oppressive marginal rates.

What we are saying is you buy the same necessities, but out of your relieved tax income.

16 Supplementary Paper No 9

...The best way of making these taxes operate effectively and efficiently is

with minimum exemptions and with a single rate; that is the lesson which. comes from all over the world.

Once you have different rates all of these anomalies appear, and if you had exemptions, it means you have got a very complex administration.

Australian Financial Review (13 June 1985)

"Some contributors to the taxation debate have expressed concern that the Government's preferred approach. could have adverse effects on both inflation and the level of economic activity," Mr Keating told the AFC dinner.

"As the minister most directly responsible for the Government's campaign against inflation and unemployment let me say that if I believed the proposed switch to a consumption tax would have such dire consequences, I would not have a bar of it."

According to the Treasurer, a study of 31 countries which had undertaken a policy shift aimed at extending their indirect tax base showed, that when "such changes are made with appropriate macro-economic settings, frank public discussion and offsetting adjustments to other taxes and transfer payments, they do not lead to higher inflation."

He told the conference that once the trade-union movement agreed to discounting the "one-off effect on price levels quickly washes out of the system".

The Sydney Morning Herald (13 June 1985)

Mr Keating said claims that his proposals would destroy the economy were based on "the mechanistic interpretation of macro-economic models which have not been designed to assess such a policy shift and which, could not produce any other conclusion given the assumption they are built upon".

High tax rates provide disincentives to work, save and invest: lower rates are essential to keep the Australian Economy Healthy, competitive internationally and growing rapidly.

"There is no more a glaring example of this that our existing tax system."

The present system encouraged wealth rearranges rather than wealth creators.

Supplementary Paper,No 9 17

The Canberra Times

(13 June 1985)

"The best way of making these taxes operate effectively and efficiently is with minimum exemptions and with a single rate; that is the lesson which comes from all over the world." he said in an interview yesterday.

However, Mr Keating pointed out that many items, including household goods, which were already taxed would be taxed less.

"For a start, you've got all the electrical goods categories - refrigerators, toasters, washing machines, electric kettles, polishers - all those sorts of things are taxed at the 20 per cent rate and some at the 32.5 per cent rate." he said.

"The notion that nothing which is of a household nature - a whole stack of things in the tax scales like detergents, soap, brooms - is taxed is not right.

"The only thing is that people don't see the tax rate because it is taxed at the wholesale point;..."

Luncheon hosted by Messrs Bannon & Hurford in Adelaide (13 June 1985)

Tax reform has been in the nation's too hard basked for may years. Yet it is unquestionably the structure of the tax system, more than any other feature of public policy, which influences the efficiency of economic activity

and decisions to invest, to save and to work.

... it (draft White Paper) contains a series of closely integrated reform proposals aimed at making the tax system more equitable, efficient and simple.

What we ultimately decide will affect the ability of Australia to compete in world markets in the years ahead.

It will affect the social fabric of this country for years to come and it will in part determine the kind of society in which our children will go up.

There are no simple solutions to the serious problems that confront us.

The change in the tax system will not yield any increase or decrease in revenues of the Commonwealth.

... The winners will be largely low and middle-income households, most of • who ' have not been engaging in significant tax avoidance or taking advantage of tax shelters.

18 Supplementary Paper No 9

The losers will be the tax evaders - at all income levels -and those who have

otherwise not been shouldering their fair share of the tax burden.

... The current tax system is imposing ever increasing pressure upon an ever narrowing base. This means that activities which bear the full burden of tax are retarded, while other activities which escape the tax net are given a major comparative benefit.

... In a world of tough competition, unless there are compelling national reasons, each industry will have to pay its own way.

... The current tax system is imposing ever increasing pressure upon an ever narrowing base. This means that activities which ear the full burden of tax are retarded, while other activities which escape the tax net are given a major comparative benefit.

... I see tax reform as ... important to the achievement of the Government's central aim since it was elected - the attainment of a sustained process of economic growth. This is also why I believe that it is essential that tax reform be pursued through a comprehensive package of measures which reforms both the income tax base and the consumption tax base.

... At present, the tax system contains three major indirect taxes, - customs duty, the excises, and the sales tax levied on manufactured goods at the wholesale level. This structure of indirect taxes is highly discriminatory.

... there is no logical justification for a tax which discriminates against manufactured goods compared with services, particularly in a society which has seen services replace goods as the dominate field of economic activity.

Moreover, the existing wholesale tax is fraught with anomalies and complexities, which render administration and compliance unduly burdensome.

Among its other features which make it an undesirable tax are

Its multiple rates and exemptions, which distort both demand and supply decisions

Valuation difficulties in determining a wholesale price in a world of widely varying distribution arrangements

The fact that the tax must be carried by retailers when goods sit in stock, with retail margins applied to the tax-inclusive wholesale price

A high proportion of the tax, about a half, is a tax on industry inputs.

For all of these reasons, we are inclined to scrap the entire sales tax.

Supplementary, Paper No 9 19

:.. few people are aware that they are paying the tax when they buy their

car, their washing machines, their bottles of lemonade or dishwashing liquid, it is politically a quite attractive tax.

In scrapping it, we would obviously have to find significant alternative revenue, and a retail tax `on both goods and services is the only tax which could do this.

... the second major policy objective for the retail tax.

The reduction in personal income tax rates is a vital objective in its own right.

This compression of tax rates, caused by the impact of inflation on the tax scales, has enabled governments to expand the public sector without having to legislate new tax schedules to pay for it.

It ' has led to an explosion in tax avoidance and evasion - first through blatant schemes such as the bottom-of-the-harbour and now through tax shelters, fringe benefits and outright evasion.

The burden of tax has fallen more and more on low to middle income earners - the majority of the Australian workforce.

This has, in turn, led to a substantial breakdown in the perceived fairness of the tax system - and increasingly it is likely to lead to wage pressures if corrective measures are not taken.

For all of these reasons, some switch in the burden of tax from incomes to consumption is desirable, so that crippling marginal rates can be brought down.

First, lower marginal rates will reduce the incentive to evade and increase the incentive to work, save and invest.

But secondly, the partial switch from income to expenditure taxation yields an important additional benefit.

Those people who continue to evade or avoid their fair share of income tax are required to pay some tax when their income is spent.

For the rest of the community, this tax revenue from avoiders and evaders is available for net tax benefits.

The income tax cut would be greater for most people than the increased tax they would pay on their expenditures.

20 Supplementary Paper No 9

A second concern is that inflation would increase.

The one-off price effect would wash out of the system within _a year of the introduction of the tax, provided wages do not reflect the CPI effect.

A third concern is that retailers will become tax collectors and have to buy new cash registers and so on.

This concern is heavily exaggerated.

In practice, a single rate, zero exemption retail tax is probably the easiest possible tax to comply with.

... I am sure that we are agreed that the existing tax system, applying both to income and expenditures, is fraught with weaknesses and is in urgent need of reform.

... the longer term framework of public policy must be reformed to give Australia any real hope of taking its full place in the world economy for the rest of this century and beyond.

The reform of the tax system remains as a central objective of the Government.

We recognise its difficulties.

... we believe that only a comprehensive package of measures can achieve real reform.

Without a package, it is unlikely that any significant reform is possible.

We trust that Australians will recognise that the overall community interest must be put first in tax reform as it has been to our national benefit in each of the other areas of policy addressed by the Government.

Sydney Morning Herald (14 June 1985)

"If we don't as a nation adopt this proposal, then you won't see significant reforms in this country is taxation for the balance of this , century."

The Sydney Morning Herald (15 June 1985)

"We're supporting tax indexation so we're not grabbing more and more of people's tax through stealth by just watching their incomes inflate into higher brackets...

Supplementary Paper No 9 21

"

We are about giving the ordinary person a go with some real tax cuts in a system which is then indexed and stays there, so that they are not losing more and more in the future."

The Sun- Herald (16 June 1985)

"The tax was not a magic pudding but, he said, a giant vacuum cleaner which would suck up money from the black economy and those who had been "rorting" the income tax system."

Sydney Morning Herald (17 June 1985)

"The list is, reform of the tax system, restoring Australia's economic health and defeating inflation."

"Right back through my first days as Treasurer I'm on record as favouring an indirect Tax..."

"I've always been of the view that you could not sufficiently repair the income base, that you need another base to ease the high marginal income tax rates."

"On a consumption tax: "Taxing incomes alone has whiskers on it.. .people walk away from income tax and cheat and evade... instead of taxing the backsides off people through income tax we are saying that we will make people who have been evading tax to pay some.., it's a simple tax and we will use it like a vacuum cleaner to suck up bits of the black

economy... there are these characters who have been avoiding tax and having a bludge on the system, now when they but something they will have to pay tax just like anyone else."

The Australian Financial Review (17 June 1985)

"Mr Keating, a 'street-smart' product of Sydney, showed in reply that he had an old-fashioned flair for the lingo. He said his income tax cuts were designed to put some extra deeners in the pocket of the bloke who was willing to get off his backside and earn a few extra bucks.

What's more, he was going to index tax rates which meant that the money going into the pocket would be real dollars not the phoney dollars that Fraser had conned him with."

22 Supplementary Paper No 9

"

We're supporting tax indexation so we're not grabbing more and more of people's tax through stealth by just watching their incomes inflate into higher brackets," he said.

"We are about giving the ordinary person a go with some real tax cuts in a system which is then indexed and stays there so that they are not losing more and more in the future."

Speech to King's Meadow Jaycees, Launceston (18 June 1985)

... It, is my view that no government, , no political party, would survive a failure to embrace substantial tax reform.

... I have been repeating the assertion that for Australia, tax reform is not optional. It is not only that we need a fairer system We need a more efficient system which will serve to encourage rather than hinder economic growth.

... What we ultimately decide will affect the ability of Australia to compete in world markets in years ahead, just as it will affect the social fabric of this country for years to come. We must not allow sectional interest or the demands of those who seek to profiteer from policy changes to damage the

cause of tax reform.

The purpose of tax reform is to collect the revenues of the Commonwealth in a fairer and more efficient way. It is not to increase the tax take of the Commonwealth.

... At present, the tax system contains three major indirect taxes - customs duty, excise taxes, and the sales tax levied on manufactured goods at the wholesale level. This structure of indirect taxes is highly discriminatory.

... There is no logical justification for a tax which discriminates against manufactured goods compared with services, particularly in a society which has seen services replace goods as the dominate field of economic activity.

Moreover, the, existing 'wholesale tax is fraught with anomalies and complexities which render administration and compliance , unduly burdensome.

Supplementary Paper No 9 23

Interview with Geraldine Dooge

(19 June 1985)

...I see (this) as just a first class chance to do something about the tax system which so many government have failed to look at for as long as we can remember and without a decent tax system, you can't, in the long term, keep a dynamic economy and you can't keep a fair country if only some of the people are shouldering the burden.

... Let me just say, to clear up the point, I have been basically in favour of this change well before the Treasury was ever given a brief on the matter. In fact, I was talking to people in the party and the trade unions in the middle of last year about this, well before we ever gave the brief to the

department after the election.

... what I think the public needs to understand is what we are saying is that the great majority of the Australian people would be better off ...

... I have got the best apparatus in the country here for determining what the price effects are, and whether we are right, and we've been through this, as closely as any proposal the government's been associated with.

...we are junking the sale tax system. The sales tax system taxes so many things now at the wholesale level... It doesn't tax food and clothing. That's the only thing it doesn't tax. It taxes nearly everything else.

... we are demonstrably relieving the burden on low and middle income earners, pensioners and beneficiaries and saying to them, 'you go and buy your necessities but you pay some of the tax at the point of sale where before you were paying all of your tax each week out of your income'. So in

other words, its just another way of collecting the tax but we are not going to be collecting as much.

... In the end of this game you have got to be able to put your head down at night and say, well the things we did today were the right things.

.. if the Labour Party doesn't touch a consumption tax on this occasion, it will never touch one, and if we can't get one through with a framework of the accord, talking with trade unions, the Liberals will never get one through.

That means that we are back to taking income and taxing income alone has got whiskers on it. If people think that there is some virtue in taxing income alone, when people with any advice can walk around the system, where ordinary people are locked in the vice of taxation, they have got a very poor idea of what good for ordinary people in this country.

24 Supplementary Paper No 9

Keating in Hobart

(19 June 1985, SMH Report)

(On exempting major items like food:)

Indeed, I would not contemplate introducing a retail tax which included exemptions of items in the supermarket basket.

...I' m not cutting it off, I'm killing it off stone dead ... killing it stone dead. It's not a matter of cutting off an avenue for a day, I'm killing if stone dead.

Interview on DouglasAiton Show, Melbourne (19 June 1985)

(On calculating the tax)

...this tax will be exemption free and at a single rate, what you can do is give us a proportion of your turnover at the end of the week or the end of the month. You don't have to separately tax each item.... We won't consider exemptions in this, we won't consider exemptions because we want the tax to be simple and simple to administer and to obviate the need of taxing every item.

"I would argue that, if this tax were to be contemplated with exemptions in significant areas, that would make it complex and administratively costly and would substantially delay it's implementation, I would not want to proceed with it," he said.

"The virtue of having a single rate, exemption-free tax, particularly in the supermarket context, is one of the fundamental criteria for pursuing a consumption tax. It has to be simple."

Hobart Mercury (19 June 1985)

"I am killing it (speculation on exemptions) stone dead. There is no prospect of the Government ever buying exemptions in this tax. it is not open to negotiation. It is not a matter of a negotiating ploy. It is just not on.

"I would rather not have the tax than have it with exemptions."

"But we must stop dealing with symptoms. The tax laws are in need of radical surgery.

Any other reform system would be "too difficult to contemplate.".

Supplementary Paper No 9 25

The Canberra Times

(19 June 1985)

"Soft drinks, pet food, soaps and detergents are among some house-hold goods that should fall in price, retailers willing, if the proposed 12.5 per cent consumption tax goes ahead, according to the Treasury.

Keating Transcript (19 June 1985)

"Without a decent tax system, you can't in the long term keep a dynamic economy and you can't keep a fair country if only some of the people are shouldering the burden.

"...I have been basically in favour of this change well before the Treasury was ever given a brief on the matter."

"...we could only attack the thing comprehensively that doing a repair job really wasn't appropriate and that the only way we would basically be able to off load the enormous burden on income tax was to find another base in the system on expenditure. Taxing expenditure as well as income."

...the great majority of the Australian people would be better off; that is a change of this kind that is cleaning up the tax system, knocking out all the rorts and ramps developing a base in consumption, that is taxing

expenditure, which means you tax people who sometimes either minimise their tax or worse than that, cheating and evading tax you get a proportion of it when you tax it when you buy something and by doing tha, the people who have been paying their fair share of tax will get net tax cuts and be better off. Now without that sort of comprehension you can't really offer the kind of change that this sort of review warrants."

°'...anybody who cares about working people in this country, who takes the view that you can repair the income system and make people pay tax, their fair share of tax, is just cracking jokes. I mean we have had 30 years, we have got 2,000 pages of tax law, rooms full of case law, we have had

30 years of loop hole plugging, of pot hole fillings, and yet the contribution of high income earners to the system is lower now than it was 30 years ago.

"...if some people believe that we have got a progressive tax system in income, that we can only tax income, and that in some way that's the way of repairing the income tax system to relieve people, its nonsense. What will happen is, unless we find another major base in the system, and tax

expenditure in some way, then it will be the ordinary working people who will carry the burden. As more people opt out, the short fall will be made up by ordinary working people who will pay a higher and higher proportion

of their income tax."

26 Supplementary Paper No 9

"I know that and if we don't therefore develop a comprehensive tax package

which attacks avoidance and evasion, which attacks minimisation, which knocks out the tax shelters, which gives people net tax cuts by taxing expenditure and then with the prospect of that introducing tax indexation to preserve those benefits in perpetuity... well all you, can say is you can lead

a horse to water but you can't make it drink."

"I think that this is the best opportunity Australia has had for genuine tax reform to make the smarties pay their fair share of tax and give ordinary people a break and its the last chance this nation will get this century. Because if the labor party doesn't touch a consumption tax on this occasion it will never touch one and if we can't get one through with a framework of

accord, talking with the trade unions, the Liberals will never get one through. That means that we are back . to taxing income and taxing income alone has got whiskers on it. If people think that there is some virtue in taxing income alone, when people with any advice can walk around the

system, where ordinary people are locked in the vice of taxation, they have got a very poor idea of what's good for ordinary people in this country."

PM Interview (20 June 1985)

"And I think the other point that needs to be recognised, we're paying tax on food now. You are taxed each week at 30 per cent marginal rate or 46 or 60 per cent marginal rates. You are.. .the tax is taken from your pay and then you buy the' essentials. I mean people are buying food now and essentials, obviously, and they have to pay the tax in that way."

"...the best way of accommodating any problem of regression on food is by fashioning the compensation package in a way which specifically directs funds to the people affected.

"And so the best way of dealing with the problem is basically to design the compensation arrangements around it. Now, we've done that. That's why pensioners will be over-compensated, low income groups and why there'll be net tax cuts."

Radio Interview (21 June 1985)

The main message that people have got to understand (is that) with a consumption tax, a great majority (of taxpayers) who have not been cheating and avoiding, will be substantially better off.

... So cheats beware; they will be in trouble.

Supplementary Paper No 9 27

..

Sometimes there are those who will never agree - and you've got to run over them. If you • stand in the middle of the road, you get run over.

... There is 'a simplicity of one rate on everything on turnover at the end of the week I wouldn't damn this country to every single item from toothpicks up, to be taxed separately for the next 100 years or whatever.

AM Interview 21 June 1985

"If this sort of proposal doesn't get up, one has to decide if there's much point in someone like me worrying about the Australian institutional process, and in Australian institutions, very much longer."

"I believe in the John F. Kennedy theory of politics 'Don't get mad, just get even."

"One has to do what one believes is right in the final analysis and I believe this is right and that's why I'm doing it. If there are any kicks in the backside to take, I'll take them."

"We have had no fundamental attacks on the central proposition of any substance," he said.

"In terms of tax reform this is the most comprehensive proposal any government's put down and because of its size and magnitude there are issues which people will raise. And what the Press ought to do, or you ought to do, is focus on the value of the change and the major components of it rather than focusing on one little part of it.

PM Interview (21 June 1985)

Journalist: ' Option C, if it's implemented, what inflation rate will we have in Australia?

Keating: "Well I don't know. It depends on what the underlying rate of inflation will be at the time of its implementation.

The Canberra Times 22 June 1985

"The main message that people have got to understand (is that) with a consumption tax, a great majority (of taxpayers) who have not been cheating and avoiding, will be substantially better off."

28 Supplementary Paper No 9

"So cheats beware; they will be in trouble," he said

"That to do something substantial about the marginal rates and about the average rates, to really cut the dependence on income tax and to give us the prospect of indexing the system in perpetuity, you ;really need a

consumption tax," he said.

Sunday Program (30 June 1985)

"The first thing is many of the things that are in the supermarket now are taxed under the sales tax. That may not be understood by most people because the tax is taxed at the wholesale level, . but such things as dishwashing liquid and soaps and detergents and brooms and dusters and

almost everything in the supermarket, outside of food, is currently taxed."

"Now as far as the tax on food goes, food is taxed now. You pay you 46 per cent marginal tax rate, or your 60. That's taken from your pay packet before you see it and you're sent off to the supermarket to buy what you need. So that... everything is taxed. What we're saying is you would buy your food out of you relieved tax income."

"See people today get their tax taken each week out of their pocket, before... out of their paypacket before it goes into their pocket so in other. words they pay their 46% of the margin or their 30% of the margin and ,then,, they trot off to the shop to buy their necessities. Now what we are saying, is you'd still go and buy your necessities, but you would buy it out of you relieved taxable incomes."

"In other words we are demonstrably relieving the burden on low and middle income earners, pensioners and beneficiaries and saying to them, you go and buy your necessities but you pay some of the tax at the .point of sale where before you were paying all of your tax each week out of your income. So in other words, its just another way of collecting the tax but we

are not going to be collecting as much."

"...the consumption tax is out there because it taxes income which is evaded and avoided, income which may never have been brought to tax under the income tax system. It taxes that at twelve and a half per cent and produces a fiscal dividend, to the extent that the consumption tax taxes, people on

low income, we give it back in other compensation arrangements. And the earnings from the system, from knocking out the rants and rorts and accessing that black economy with the consumption tax provides net tax cuts for the gentleman driving the tram. And what we're saying_ is that if

we can do that, we could also offer full tax indexation and we would preserve those tax cuts in perpetuity."

Supplementary Paper No 9 29

Tax Summit

(1 July 1985)

"The Australian people as a whole do not believe that the existing system is fair. They do not believe that it rewards initiative. It is a measure of our desire to achieve lasting reform, to succeed where others have failed.."

"Let me again remind all participants of the huge responsibility which is on our shoulders. It is no accident that tax reform is dominating the social and economic agenda in Australia at present. No other single element of public policy has the capacity of the taxation system to affect fundamentally the fairness and efficiency, indeed the very quality, of our society."

"What is absolutely certain is that the approach of doing nothing does not exist. We cannot sit back and watch another million taxpayers cross into the 46 per cent tax bracket over the next three years."

"We are here to listen to and to make reasoned and sensible argument. But it needs to be understood that the reform of the taxation system cannot be expected to become the mechanism for solving every community problem. The tax system's primary purpose of raising revenue for the provision of

government services is hampered if it is diluted by a host of other objectives. It becomes unduly complex, inefficient and prone to avoidance."

"Those conditions include a requirement that the new tax structure be fair and efficient. Fairness requires that the needy are at least compensated. Indeed, the Draft White Paper provides for significant increases in payments to pensioners and beneficiaries over and above that required to pay the consumption tax or what would be provided under the usual indexation arrangements. Other needy low income groups are also made better off under the proposed package."

"It always needs to be remembered that every tax concession granted to one group increase the load that must be carried by others."

"An exemption for food has been suggested. Such an exemption would not add the fairness of the tax package, because the pension increases and income tax cuts have more than taken any tax on food into account."

"We have never denied the regressive nature of a food tax considered alone -indeed, most indirect taxes are regressive when considered alone. But as part of a broader package, the change is not regressive at all."

"Efficiency requires that the tax be simple to operate at the retail level. Insofar as the great majority of retail outlets are concerned, this efficiency is best achieved by a tax which does not involve exemptions for certain categories of goods."

30 Supplementary Paper No 9

Tax Summit

(2 July 1985)

(On Option A)

We cannot leave the system to haemorrhage the way it is.

We cannot leave the position where people on 46 per cent, 48 per cent or 60, per cent have the option of really dramatically minimising their tax while everybody else has to lift their tax to pay for that position of privilege which those taxpayers enjoy.

We have seen people opting out of the system and the system making up the offset by taxing more heavily, at even higher rates those people still left in the system.

Rather than the higher rate producing a tax harvest, all it has done is encourage people to minimise, avoid and evade.

It is worthwhile. It is equitable. It is important. ` But is it enough to do something about the marginal rates which we have?

Essentially, it would provide very little relief for anyone, under $19,500 or the great bulk of the full time work force.

The Sydney Morning Herald 2 July 1985

"...in the final analysis any government has to determine what is (a) the right thing to do and (b) the most sensible political thing to do. And I've got no doubt that genuine tax reform is the right thing to do. And I've got no doubt that genuine tax reform is the right thing to do because it gives the people who are not noisy in this country - and that is the average person who pays it out of their pocket before they ever see it, and are paying more and more as other people pay less and less. It gives the ordinary person a go for the first time in a long time."

"...the Government's option. As I said, we're four weeks old and it's still standing out there - very proudly, I might say. It's still standing up very proudly. And there have been no basic, effective, frontal assaulth.. upon it and unless there's a whole lot of argument we've not heard, I'll be surprised if there is."

Giving vent to some of the Government's frustrations, 'Mr .Keating said: "The general tone of many of the comments has been divided,, sectional and too uncompromising in tone," he said.

Supplementary Paper No 9 31

"A recital of individual sectional interests will not take us far.

"We want delegates to consider other people's views, to understand the validity of the other point of view and to make some move that will help to find a better tax system for the country."

The Melbourne Herald 2 July 1985

"The central question is not whether to repair the system. It simply has to be done." D

The Australian

2 July 1985)

"The Government believes that it is now time to take a more fundamental approach. It is time to establish a broader tax base with greater integrity, allowing a fairer sharing of the tax burden with lower rates of tax.

"The rates of tax in both areas are brought down by an average of about 30 per cent, while the proposed consumption tax rate of 12.5 per cent compares with most sales tax rates of 20 and 32.5 per cent.

"The Government believes that, provided certain conditions are met, such a comprehensive reform of both bases is the most ideal for Australia.

AM Interview 2 July 1985

"...I don't think anybody ought to run away with the notion that because any of these groups that have said they've got difficulties with the last crossed 't' and dot point of approach C that people are not going to support it, because what emerged again today is not other clear option coming from

the participants. There is not other proposal coming through."

Press Conference & Statement (13 August 1985)

Keating: ... I have always believed that an across the board, broad based consumption tax was the best tax option for achieving major reform of the Australian taxation system and moving the weight of taxation of direct taxation onto indirect taxation.

32 Supplementary Paper No 9

Journalist: Will the wholesale sales tax rationalisation raise any additional

revenue for you?

Keating: No, it will be revenue neutral, but that will still mean substantial additions to its base. They will not be as substantial as perhaps we proposed post-Summit, that is clothing, books, newspapers....

Journalist: Was it worth the political pain...

Keating: Well, let me just say this about that. I think the answer to that is yes. That I think the reform which will emerge will be well worth the effort. I think the value of the White Paper will sit on the public record as

the Campbell Report sat on the public record. It is the first costed, analysed proposal for major tax reform in this country. It is not just a figment of someone's imagination, any uncosted, untested idea....

Journalist: Do you think Option C's time will come in a future government? Keating: It may well do. Option C's time may come when the public of this country believes that such a reform can and should be undertaken.

Supplementary Paper No 9 33

Authorised by: John Hewson and Tim Fischer

Parliament House Canberra ACT 2600 Printed by: CPN Publications Pty Ltd Wollongong Street, Fyshwick ACT 2609