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Monday, 5 June 1989
Page: 3304

Senator ZAKHAROV —My question is addressed to the Minister representing the Treasurer. Did the Minister see an article entitled `Money, Credit and the Demand for Debt' in the May 1989 issue of the Reserve Bank Bulletin? Did that article note that the debt to equity ratio of stock exchange listed Australian businesses has risen from around 45 per cent in the early 1980s to about 100 per cent now? Is the Minister concerned about this development, and does the Government expect the debt to equity ratio to continue to increase?

Senator WALSH —I have not read the whole article, but I have looked at the various statistics presented in it. The article does note that in the course of the 1980s Australian business came to rely much more heavily on debt finance as opposed to equity finance. I am certainly concerned about that development, and I have been for a long time. Among other things, it means that business is more unstable and more vulnerable to swings in the business cycle. It is also not unrelated-indeed, it is probably quite strongly related-to the build-up of the Australian private sector's international indebtedness.

Whether it is reasonable to expect the trend of the 1980s to continue into the 1990s depends on what the causes of the 1980s trend were. They include the old-fashioned double taxation of dividends. Under that system there was a clear incentive for equity to be replaced by debt. We have got rid of double taxation with the imputation system. The Government moved to that remedy in July 1987, but that still left a problem if the source of the debt financing was a body not paying tax. Under those circumstances the interest payment was completely tax-free, not taxed at any point.

On the other hand, dividends were subject to one layer of taxation instead of the previous two. Therefore, superannuation funds still faced a massive incentive to provide finance via debt instruments rather than company shares. In response to that, in the May 1988 economic statement, the Government moved to bring superannuation funds into the imputation system and the level playing field.

For reasons similar to the treatment of interest payments being tax deductable in the hands of the payer but not taxable in the hands of an exempt body which was receiving the interest, as against equity which was taxed once or which is now taxed only in the hands of a company, the still existing arrangements which the Government moved to correct in May 1988 favour investment in foreign equities as against Australian equities, investment in real estate or speculation instead of equity in businesses engaged in productive activities-factories, mines and so on-and also provide incentives to superannuation funds to engage in joint ventures instead of company shares; that is, in the process bypassing the corporate taxation point and eroding the corporate tax base-an erosion, were that position allowed to remain unaltered, which would probably proceed at an accelerating rate.

Senator ZAKHAROV —I ask a supplementary question, Mr President. What action can the Government take to correct these distortions and their effects on domestic employment, economic growth and foreign debt?

Senator WALSH —The Government is trying to correct those distortions which I have outlined, which damage Australia's economic growth, international account and employment, with a package of Bills now before the Senate. Unfortunately, we are being sabotaged in that attempt by an opposition which does not even know what it is doing-supported, up to this stage, I regret to say, by the Australian Democrats, who are repudiating their rhetoric of the last six years.