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Transcript of debate at National Press Club, Canberra: 16 September 1998: Tax reform; economy

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Debate at the National Press Club, Canberra

Wednesday, 16 September 1998

1.00 pm


SUBJECTS: Tax reform, economy


Well thank you Ken and thank you members of the National Press Club. When our Government was elected- 2 'A years ago before there was an Asian financial crisis, when Asia was still growing, when Korea was booming, when Thailand and Indonesia and Japan were showing strong growth, Australia was struggling. Labor had left the Commonwealth Budget $10 billion in deficit. Over the last five years Labor had racked up $70 billion of cumulated deficits and increased Commonwealth Government net debt by $80 billion. Labor had Australia on a path of deficit and debt into the next century.

And our Government hadn't created that mess, but our Government took the responsibility to fix it. We sat down and we decided to put Commonwealth finances back in order. To get the Commonwealth Budget back into the black, to set Australia back on track.

I said in our first Budget in 1996 that if we didn't attend to Australia's financial house then we would be dangerously exposed to shifts in international outlook and sentiment. We didn't forecast then the downturn in Asia but we knew if we didn't strengthen the position here in Australia we would be dangerously exposed. And we set down that plan to put the Australian Budget back into the black, to turn

away from the path of deficit and debt that Labor had this country on, right into the next century, we were fought every inch of the way. The Labor Party fought our program every inch of the way.

First of all LahMsaid that there was no deficit, according to Mr Beazley in April of 1996 it was largely a fraud. And yet the Commonwealth audited accounts showed and Mr Evans has subsequently conceded, kicking and struggling and screaming, that there was a $10 billion deficit and that was the situation that this Government inherited.

And then after denying that there was a problem in relation to the Commonwealth finances, the Labor Party said it would fix itself. In August of 1996, Mr Evans said it would largely be self-correcting.


And then when it was clear that to actually get the Budget back on track and back in the black, that it was going to take effort and it was going to take this Government's concerted, good economic policy, the Labor Party then criticised the Government for going too far, too fast. Mr Evans was saying in January of 1998 the Government went too far, too fast. Our international credibility did not demand the Government going as far as it did.

And then in April of 1998 after denying the problem, after saying it would fix itself, after saying we'd gone too far in fixing it, Mr Evans was finally forced to concede that he himself, if he were in government, would have to exercise real budgetary constraint and wiiiikt not seek to try and reverse the good economic policy the Government had achieved. We had achieved the goal. Being fought every

inch of the way by the Labor Party only to find Labor finally endorse it and now try and make it their own. But it wasn't their own. If the Labor Party bad succeeded in the economic policy that it sought after the March 1996 election, Australia would have been dangerously exposed. If we hadn't have had the hard work over the last two years, we wouldn't be arguing now about the level of budget surpluses

into the future.

And the second thing that came as a result of our Government showing leadership in relation to the economic situation, by keeping inflation low and locking it in with a new agreement with the Reserve Bank, by getting the Budget back in order, by starting to repay Labor debt, is that we were able to run a low interest rate policy in this country. When Labor lost office the home mortgage variable rate was 10 1/2 per cent. Today 3,611 can get a loan at around 6 1/2 per cent. If Labor could have produced lower home

mortgage rates, it would have. But it wouldn't do the hard work in relation to the Budget and in relation to debt and in relation to inflation.

The third thing that low interest rates gave Australia at a time of international challenge, was it gave Australia the ability to continue domestic demand in spending as the international climate turned against us. Because interest rates were low, last year we had a record in relation to motor car sales. Because interest rates were low, average families saved S3 800 a year on their mortgages. It was money back in the pocket of families, money back in the pocket of young home buyers. Money that they could spend, money that could keep Australia going in the midst of this international challenge. And in the last year our economy grew at 4 per cent. Higher than the economies of the industrialised world, higher than the

average of the economies of the industrialised world and it made Australia the strong economy of Asia. When we were elected we were lagging and Asia was booming. And notwithstanding the fact that Asia turned against us over the last two years, Australia became the strong economy of the region.

But it would be a mistake to think that we can sit back and say that there is no more work to be done. If we sit back and say that we will just be buffeted around by international events, if we don't take hold of our future, the opportunities for future Australians and unforeseen events in the future may well turn against us. We need a new tax system. Those that say that it's not broken and only needs repair are

wrong. Those that say fixing the tax system is just a matter of orange juice and caviar understate the problem.

We need a new tax system to help our exporters, to promote trade, to create jobs. Our Government has a vision of making Australia a business centre in the Asian region. If we abolish financial institutions duty and bank account debits taxes and stamp duties and duties on share transactions, this will be the place in the region which will be the financial centre, the business centre. If we get our income tax rates down, on

average income earners and give people incentive to work and to save and to create and to invest, the opportunities fiu-Australia will be so much greater. If hope triumphs over fear, if policy triumphs over populism, if we get a new tax system for a new century, the opportunities for young Australians will be so much greater.


Labor has no tax policy. It has cobbled together a series of proposals designed to get it through an election period. It says to the self-funded retiree, from whom it takes the savings rebate, there will be no reduction in income taxes. It says to average earners, earning more than $43 000, they can face effective marginal tax rates of 59.5 per cent. It says to single income families or dual income families, if they have

children they can go backwards in tax. And it says in relation to capital gains tax, that the assets which it said would be quarantined forever, will be subject to capital gains tax for the first time from 1 January of 1999.

Government is about being elected to do things, not to stop things. To build, not to patch and to sew. To take the problems that are confronting us and overcome them. Government is about leadership in relation to the economy and tax. And Government is about confronting honestly those issues and building them

for the future.

Thanks very much.


Thank you very much Peter Costello. And it's time now for the opening statement from the Shadow Treasurer, Gareth Evans.


Thanks Ken, thanks everyone.

The most fundamental difference between the Coalition and Labor when it comes to economic management is we haven't lost sight of what the whole business is about. And that's maintaining and improving the wellbeing of the people of this country. We're all obsessed with the financial bottom line these days, and rightly so. But Labor is obsessed with the human bottom line as well. We believe the

two aren't incompatible and we can and will deliver on both.

The Coalition of course says it knows where it wants to go and has a tax plan to take us there. It's not a plan for the nation or for the wellbeing of the people of this nation. Certainly not a plan for jobs. And it's not a plan for the restoration of decent public services in health or education or anywhere else. All it is, at the end of the day, is a plan for a new tax in two years time. An unnecessary, complicated, inflationary, job-destroying GST.

When it comes to plans of any kind of course, Coalition promises should be taken with a grain of salt. You remember that before the last election, John Howard said that he had a plan to reduce the scourge of youth unemployment and that his performance here would be a mark of what he's been able to do as a Government. Well some plan, some mark. Youth unemployment has got much worse under the present

Government, up from 26.8 (per cent) to 28.2 (per cent), with pockets around the country like the La Trobe Valley where I was earlier this week of over 45 per cent. Alarming and ugly. Long term unemployment was also going to be hauled back. But that's got worse too with over a quarter of a million Australians now condemned to that despair. So too with employment over all. The record here has been lamentable.

When Labor left office, after fighting off the recession that affected most of the industrialised world, unemployment was tracking down to our target rate of 5 per cent. Now its plateaued at over 8 per cent with almost exactly the same number of people employed now as, unemployed now as then and with another 50 0004arecast by Peter Costello's own Departmental Head to be on the dole by the end of this

year. The Coalition brags of having created over 300 000 new jobs in its 30 months in office, but we produced 650 000 jobs during that same time period, our last 30 months.


As with jobs, so too with the current account deficit and foreign debt, before the last election you remember John Howard saying at the time of launching his foreign debt truck, that we have a plan to tackle the current account deficit. Well then again some plan, some tackle. The current account deficit for last year was a massive 40 per cent up on the previous year. It's now heading towards 6 per cent of

GDP. Since John Howard and Peter Costello took office, foreign debt has increased by $30 billion, more than $1 600 for every man, woman and child in Australia.

So fresh from these triumphs, we now have the Howard/Costello tax plan with a GST as its centrepiece. It's not a plat that owes anything to fairness in its impact on lower income Australians and Neil Warren among others, the Prime Minister's favourite tax economist has made that clear in a paper released today, in which he says the Government has adopted a thoroughly cynical view towards the consultation process, that's led it to make serious errors in the assumptions on which it's done its calculations, in particular about the impact of different patterns of household consumption, that those assumptions are

clearly unrealistic and they bias the results in such a way to underestimate the indirect tax burden on the poor and overestimate the indirect tax burden on the rich.

That's the fairness story, but so too with the economic story. The Government seems to have learnt nothing from international experience, very succinctly summarised in that IMF analysis reported in The Age this morning under the heading 'Cure all it ain't'. Review the operation of the GST or VAT in the 70-odd countries where it's been introduced since the '50s the IMF report concludes that this kind of tax

does not fundamentally enhance economic performance, does not have a significant effect on exports, does not tax the black economy and it's open to invasion and is regressive in its impact.

Whatever else the Howard/Costello GST package is going to do, it won't be anything for jobs. By taxing services for the first time it's putting a barrier to job creation in the very area that we're all most relying on for jobs growth. It's creating new burdens for small business and it's not relieving the burden of payroll tax from big business. Its assumption that businesses generally and exporters in particular, as well as consumers, will benefit by billions of dollars from the diesel fuel cuts is a triumph of economic modelling hope over real world experience. It just can't be assumed that those cuts will all be passed on.

It's understating the impact of the whole package on inflation estimated by the economic modelling bureau-in another report out today, as perhaps as high as 6 per cent, the impact on inflation, not the 1.9 per cent that the Government quantifies it. By focussing it's tax cut bribes on the better-off, it's benefitting most those which the lowest marginal propensity to consume, and who when they do consume

have a much higher propensity to consume imports. And by drawing to such a huge extent as it does on the surplus to pay for its income tax cut bribes, the Coalition has dramatically reduced its capacity to spend resources even if it wanted to, which it probably doesn't, on outright job creation, on investment incentives and on the restoration of job generating public services.

Labor's tax reform policy is completely differently focussed with job creation as its central theme. There's no job-killing GST or any other tax on services nor will there be. We targetted our tax cuts very precisely. Not only where they're most needed in equity terms to battling, low and middle income families, but where they're most helpful in economic terms, to those who's marginal propensity to

consume is in fact the highest.

Our tax credits and rebates which are a dramatically, spectacularly innovative reform in the Australian tax system, are designed specifically as incentives to work, to encourage people to make that transition from welfare to work. And integral part of our tax package is a set of business tax incentives to engage in job generating investment, in innovation in regional development, in infrastructure and in venture capital.

And our whorCpackage is crafted in a way that's revenue neutral, not drawing on the budget surplus at all.

Compare that with the Coalition's $11 billion in the first three years of the operation of the new system,

$18 billion over the first four years. By not drawing on the projected surpluses for our tax package we've given ourselves the room, even if the economy turns down as we think it will, to spend resources where they're desperately needed — in jobs, health, education and other high social priority areas neglected or devastated by the Coalition.

You've now seen what we've been doing, but what we're going to do on health, on education, on age care and you'll see brought together and added to next week exactly what we're goinkto do on jobs. And how we're going to meet the 5 per cent target that we've set ourselves here. The policies that we've announced so far, including the impact of our tax package, add up to just $5.8 billion, nothing like the $18 billion worth of shonky figures which Peter Costello was caught fibbing about last week. We are with

those who believe that there is absolutely no foundation for the Treasury assumption that there will be a 3 'A per cent growth rate out every year from '99-2000 onwards. The Charter of Budget Honesty is already proving itself to be in the hands of this Government a joke in bad taste. We know that the Treasury has prepared a preliminary forecast for growth at least for '99-2000, and there's every reason to believe that

forecast will be much closer to the current financial markets current average prediction of 2 Vt per cent for that year than it will be for the 3 'A (per cent) that's projected for that and the other out years. If Peter Costello wants to restore some confidence in his own credibly and in his Charter of Budget Honesty

process, he's honor-bound to produce that Treasury forecast right now and put it on the table. There hasn't been an awful lot of decency in the way that this economy or anything else has been managed by the Coalition in the last2 'A years. There hasn't been an awful lot of decency or honesty in the way the economic debate has been pursued by the Treasurer in this campaign so far, so I invite him and encourage

him to begin making a just a few amends for that by producing that document right now.


• Thank you both. It is time to move onto questions which we will deal with from these positions. And the first question today is from Philip Hudson.

PHILIP HUDSON: - -Philip Hudson from The Age. My question to Mr Evans is, if ACOSS, Bernie Fraser, the Evatt Foundation who are all obviously strongly of the mind to create more jobs, and numerous reports say we must tax some services, and you said a year ago tomorrow, that the services part of the economy is not pulling its weight, why won't the Labor Party tax services at all? And on that point to Mr Costello, if you believe Bernie Fraser when he says we should tax some services, why won't you believe him when he

says the Evatt Report is not finished, it's not being hidden. Aren't yOu just running a scare campaign, and a liar?


Well we take the timings on those as being combined on the two questions. Since the first one was directed to Gareth Evans, would you like to start.


The reason we are not going to tax services, is because services are the job generators in the economy and we simply think it's wrong headed to be putting a barrier to employment on the area which is most capable of gen1 -5ting the jobs that the economy needs. It is true as a matter of analysis that Australia taxes services less than it does goods in the indirect tax sector, the truth of the matter, however, is that that has always been a matter of legitimate policy choice, and there are perhaps better reasons these days for

making such a choice than there ever were in the past. The reason being that which I just stated about the job generating potential so far as services are concerned.


There are good policy reasons for taxing goods in the way that we do at the moment, which enables a lot of discrimination to be applied, as between luxuries and necessities, as between socially useful goods and those which are less so, as between one-off purchases and regular purchases, and generally those goods as well which are environmentally sound or worrying as the case may be and those which are not. The

question of revenue adequacy is one that we have obviously had a look at, because as a Labor Party committed to decent provision of public services and public goods in the future, the last thing we want to do is put ourselves in a position where we would be denied a revenue source that is critical.

But having looked at this very carefully over the last year, we've made the decision that we don't need to go down that particular path for revenue purposes, that as long as you continue to maintain the rigor and effectiveness of your income tax base, and anti-avoidance and evasion measures are critical in that

respect, and we've got many of them in our package, then you simply don't need the extra potential revenue flow that's involved in the GST, or a consumption tax or a tax on services of any kind. The adequacy of that revenue flow for the future is really amply demonstrated by the latest Budget papers which of course project out into the future, maybe optimistically, but none the less its there, a very

substantial surpluses based on a no policy change set of assumptions, so far as the tax system is concerned. We have eroded a little bit of our indirect tax base in recent years, particularly because of the dramatic decline in revenue from tariffs, as a result of the tariff cutting process, we are generating about $8 or $9 billion less a year than would otherwise be the case. And that's one of the reasons for the changes you see in the figures about the relative decline of indirect to direct taxes. We are not going to back track on that. We generally think that we have a package which is sound, well balanced, equitable, economically useful and will sustain us into the future.


Thank you. Mr Costello.


Yes Ken, well look the answer to that question that Gareth just gave was gobbledygook. There are 140 countries in the world that say he is wrong, that apply value-added taxes to services. Why? Because in modern economies as services grow, if you are not going to tax services the weight of the tax system just falls on the goods base. Mr Evans is defending in this election a .wholesale sales tax which he says is a good design for the 21. st Century which is applied in Swaziland, Botswana, Ghana and the Solomon

Islands. That's the modernity of Labor Party thinking. Now on the 13 th May 1997 Mr Evans said this,

"there are some problems in the tax system, and I think we are all aware of them, in particular the fact that the services part of the economy is not I suppose, pulling its weight as the character of the economy changes". He was right then, 100per cent right. The reason why he won't say that during this election campaign is not because he now thinks he is right, but because the Labor Party has decided to go out on populous, cheap, populous policy, which is not in the interests of Australia. Now I come to Mr Fraser.

Mr Fraser, as reported in The Age yesterday by a very reputable journalist, Philip Hudson, is quoted as saying this: "We do need to rationalise the existing (wholesale sales tax rate differential)", I agree with that, "and the number of exemptions", I agree with that, that Labor Party doesn't, "we also need to explore the possibility of imposing on a national basis a limited and selective tax on services". So what

Mr Fraser is saying, what the advisors to the Labor Party through the Evan Foundation are saying, the wholesale sales tax needs changing and we need a services tax. The only question is, how limited. Now, what we would like to know before the election, is the advice that will be coming to the Labor Party on how selective4itis- services tax is going to be. We want to know what services and what rates. If Mr

Fraser hasn't finished the whole of his report, he could release that part of it. What services, what rates?

Now, we also had the Director of the Evatt Foundation, who is also on this Commission. He said on 4QR, regional radio in Queensland yesterday: "We have discussed the notion of rationalising the wholesale tax system, and perhaps introducing a few selective retail taxes on some services." Which services, which rate? This was a report that was going to come out in April or May, we need to know

before the election.

The Australian public needs to know before the election which services, which rates, so that they know

the full gamut of what's going to be advised if a Labor Party were elected to that incoming Government as it turns to the tax issue after the election.


Thank you, can I point on the basis of that first exchange, that if everybody asks two questions there won't be very many people take part in the question period. The next one is from Michael Dwyer.


I have a fairly, or what I hope is a fairly simple question for both of you about Australia's exposure to Asia. Do you think the Australian economy is likely to grow slower or faster next financial year than in the current financial year?


Well Gareth went first last time why don't Peter Costello start this time.


By next financial year do you mean 1998/99?


That is correct.


OK. We are coming off a 4 per cent growth rate. We are forecasting that growth will turn down in 1998/99. What happens in 1999/2000 will depend very much on what happens in the international environment. It may well be that some of these countries have bottomed. There are encouraging signs in Korea. It may well be that in some of these countries there will be ongoing problems. But in relation to the Australian domestic economy, we've got good demand, we've got low interest rates, we've got low inflation, we've got a Budget in surplus. If our Government is re-elected we have a plan to reduce Commonwealth debt to GDP to about 10 per cent, and we will have a strong domestic economy. Now, I actually think that there is every reason to think there will be a turning in Asia by 1999/2000. Just as the

Asian crises came on quickly, it could pass quickly, that was certainly the experience in Mexico. In . relation to the US economy, the US economy is going to be very important to this obviously, so I would say that there's every reason to think we could have a better year. The Treasury projection as you know, which is the best advice that's been given to me, is that you can't do better than project the long term

growth rates, which I actually accept. But in the course of all of this, I will want to make one point, and perhaps Gareth could answer this when his term comes. The Australian economy grew in the last financial year by 4 per cent , that's an outcome. That is an outcome. Mr Evans was saying as recently as some months ago that the last quarter would be a negative one. He said the last quarter would be a

negative one. When the figures came out, not only was it positive, but the Australian economy grew by 4 per cent. We had only forecast I think 3 1/4, we exceeded the forecast. We exceeded the forecast. Now I've always had one rule of operation in relation to forecasts. I have never tried to interfere, I've always accepted the Treasury's advice, they understated the outcome in 1997-98, we did better and with a strong

domestic economy I believe that there is every opportunity for Australia in the future.



Well just for the record I didn't say that we were going to go into negative growth in the June quarter, I said we'd go backwards from the 4.9 average that had been chalked up in the March quarter. And I think that everybody understands that context and we certainly did going back to 3.9 and that's the truth of the matter.

As to what's going to happen into the future I'm sure that Peter Costello does have available to him better Treasury forecasts that was reported in the Fin Review this moi,ng, I'm sure that was an accurate report, than those that appear in the form of projections, the 3.5 per cent projections, for these outyears. And I'm sure those Treasury projections are a darn sight more pessimistic, the Treasury forecasts are a darn sight

more pessimistic, than the formal projections which are sitting there on the paper at the moment. It's very hard to believe that it is anything like 3 'A can be achieved in 99-2000.

Through the year growth in the current year can be reasonability expected to be down to about 2 per cent by June next year and picking up from there to 3 1/2 in an environment where you have got both external and internal constraints glowering at you is simply wholly unrealistic. The external ones are obviously primarily for us Asia and anyone who can be very, very confident about what's going to happen with

Japan flowing through into Korea and China in particular quite apart from South East Asia is I think having themselves on in the present environment. Add to that the Russian crisis with it's potential impact on commodity pric-es, the impact of the Latin American crisis on a whole variety of other international dimensions and the fragility is still obviously there in the US stock market and you've got some very,

very real downside risk for us.

Internally you've got a whole lot of grounds for concern that are really very visible in those June quarter national accounts. You've got a visible falling away in our terms of trade, you've got a high build up of stocks, you've got a decline in construction activity and you've got a falling away in business fixed

investment. All there visible on the record for the June quarter. The average of the market forecasts, the gaggle of them were collected in the Sydney Morning Herald a couple of weeks ago suggests that the figure for 99-2000 is much more likely to be around 2 'A than it is 3 'A. We think that's possibly a bit pessimistic and that if we were in office certainly with some significant policy changes we could do better than that but for budgetary purposes in terms of making the assumptions about what's doable on the outlays side we think that is probably a reasonable starting basis. So count me in as one of the pessimists

in that respect but for very good reasons.


Next question's from George Megalogenis.


George Megalogenis from The Australian newspaper. Treasurer you recall that both you and the Labor Party promised to deliver $4.5 billion worth of LAW tax cut money into private savings. Can you explain why you broke the promise and why the breaking of that promise makes you more trustworthy than Labor? And Mr Evans can you explain why Labor hasn't revisited that policy even though that was the

core of your 1995 Budget?


Well I guess there has to be a three minutes each to, we're getting away from responses in this way but still.







No, no, no I actually wanted to pull out, Gareth, something that you'll recognise. It's the LAW, this is the actual LAW which Paul Keating introduced before the 1993 election. You'll see that it was actually ef......ted, you'll see that the LAW for example cut people on between $40,000-50,000 income to 40 per cent which I think Gareth now says is an outrageous tax cut for high income earners. You'll see that it cut the tax rate of everybody up to 40,000 to 30 per cent, which I think you would now also say is an outrageous cut for middle income earners and you'll also know that this is the Bill which was never applied for one day. It was not enacted on any one of the days after Labor was re-elected, after its last

anti-GST campaign. All they had to do George is go down the Yarralumla and convene a meeting and bring it into law. It was never enacted for one day, that's where Labor's anti-tax reform campaign ended in 1993. That Bill never enacted for one day and every wholesale sales tax rate went up, every single one

of them.

Now the Labor Party, I've noticed now, blames us for not implementing their promises which is a new twist in politics that we had the responsibility of implementing their policies. What we said in relation to savings, as you kno*, as we introduced the savings rebate which was to reduce taxes on savings and it will now be over taken by income tax reductions for all people including those that live off savings.

Income tax reductions which will meet or match or better the LAW which is were this saga began. This saga began with an LAW which was never implemented. I might make the point that if Mr Evans got to implement his current tax policy he would still have middle income earners in 2002, 2003, 2004 paying higher taxes than they would have been in 1993 on the same nominal incomes than if he had delivered on the LAW. Now in the 1993 campaign we didn't put enough scrutiny on Labor, Labor went all through

that campaign saying they were anti-GST, what we hadn't figured out was that they were also anti their own income taxes and they were also pro increases in WST. This is why in this campaign it's important to have the scrutiny on Labor, it's important to know which services, which rates, let's get it out before election day this time rather than find out about it after the election day.


Thank you. The next question is from Tom Allard.


Hang on I've got to answer that, I've got to have a minute.


Well if we keep on doing that we'll get no more questions.


I'll keep it short, it will only take a minute. Of all the promises, the scores of promises that were broken by the Coalition in the 1996 Budget and subsequently the most flagrantly, economically irresponsible of all of them was-the abandonment of the Coalition's own promise to pick up the superannuation co-contribution which was to be the second installment of our tax cut. If you recall that the tax cuts that we

promised in '93 were to be delivered in two parts. The tax cuts were to be delivered in two parts. The first part was in fact delivered, brought on 6 months earlier than was originally announced, the second part was deferred until that subsequent parliamentary period when it was to be introduced by way of a co-contribution to superannuation, 3 per cent form the Government matched by 3 per cent from the



It would have been the single most significant structural reform in Australian history so far as savings were concerned. It would have brought that savings base up to 15 per cent, it would have given us a foundation for this country's future. The time was right to do it then, it was just saleable, it was just deliverable in the context of the accord and everything else and it would have been delivered under us. It

was not delivered under the Coalition and franldy their failure to do so was absolutely disgraceful and remains so to this day. The savings rebate that was put in there as a notional compensation for knocking off the particular super-co contribution lasted exactly how long, exactly how long, six weeks I think this current financial year before you announced in the Budget you were going to knock it off.


Two years, two years.


The actual implementation of it, you know you ought to be...


Two years.


It was just introduced when you announced there was about to be knocked off and you thereby have established a very clear track record of how well compensation is going to be delivered and sustained under the GST and I hope that particular point is noted for future reference as well.


One minute if I could to respond Ken if I may. One minute to respond because I'm not sure if it was a slip or not but Gareth said that the tax cuts which were promised prior to the 1993 election were not delivered. They were not a promise, they were LAW. Mr Keating stood here and said you don't have to believe my promise, they are in law. That law sat on the statute books and was never proclaimed for one

day. Now the Labor Party after not delivering on a law over a period of six months said we will start delivering on superannuation in 6 years and you.


You said you would pick up the pieces and run with it.


Well this is where you get into the point...


Are you denying that you got....


Gareth this is where you get into the point of we're responsible for you breaking your promises, which I said ........



1 1

TREASURER: a new, is a new doctrine in Australian politics. You.......


You made our promise, your promise and you are saddled with it.


You are not proclaiming this for not proclaiming for one day you then said 6 years down the track you would do something about it and you never did.


Our promise became your promise and you broke it.





Next question is from Tom Allard.


My question's to you Mr Costello. One of Australia's foremost tax economists, Neil Warren, who worked on the Fightback policy with you guys, has given a scathing assessment of your tax package. He said that the process developing it was cynical with a lack of community consultation, he says the assumptions underlining the tax package are incorrect, clearly unrealistic I should say. He said they are

biase€1,-they underestimate the effect the GST on poor people and over estimate the effect of the GST on rich people. Do you concede that the affect of the GST on the cost of living of some people will be bigger than the average and if so why didn't you compensate for that in your tax package?


Well can I just say in relation to the consultation period there was consultation over a period of a year, the Gibson committee was set up, the Gibson committee took consultation from the community. I must say I consulted with all sorts of community groups, I had meetings with ACOSS, I had meetings with business groups, I had meetings with industry groups and that went on over a period of 12 months. So there was

extensive consultation in relation to that.

Secondly can I say in relation to the price impacts of broadening the indirect tax base the document here, and it's got all of it's assumptions and models, puts that at 1.9 per cent. I think I saw Chris Murphy put it at 0.9 per cent, which was substantially less as an independent report in relation to that. But we said in relation to pensioners, and this is an important point, that not only would we increase pensions by 4 per

cent so that there was over compensation for a 1.9 per cent price impact but we said a second thing and that is that we will maintain the pension in advance of the CPI by 1 'A per cent. So that if the CPI were greater the increase in the pension would be greater to ensure that the pension is I 'A per cent in advance of what it would be it if were merely tied to CPI. Now what that means is that the pension will actually

go up in real terms by 1 1 /2 per cent, this is an important point. In this election the Coalition Government policy is a real increase in pensions to be maintained over time. That is in addition to the way in which we are changing the pensioner rebate by allowing pensioners to keep more of what they earn before they are phased out under the taper test. It is in addition to the increase in the pensioner rebate, $250 and S350

for couples.


It is in addition to the excess franking credits, the refund of excess franking credits which we have announced in relation to our package and that is in addition to the 30 per cent rebate on private health insurance which will be particularly of benefit for older Australians who proportionately take out private health insurance at a greater rate. So you've got an increase, a real increase in pensions, an increase in the pensioner rebate, an easing of the taper, you've got excess franking credits and you've also got private health insurance. Now this is a wonderful thing for aged pensioners and a wonderful thing for self funded retirees who also get the benefit of income tax cuts. But under the Labor package, self funded retirees

don't get any income tax cuts, they don't get any increase in the pensioner rebate and they don't get any concession in relation to private health insurance.


Well you've just been subjected to a nice old con job there so far as pensioners are concerned. The truth of the matter is that both governments are and have been for a long time committed to two kinds of pension increase, one the CPI, secondly supplemented by a commitment to maintain aged pensions at 25 per cent of male total average weekly earnings, which are currently running at around about 4 per cent as

compared with the CPI of around 2 or whatever. So the point is that there is already a commitment to add whatever is necessary to the CPI to bring it up to male total average weekly earnings. And the 1 1/2 per

cent that the Government has on offer does no more than that which would be delivered anyway if they were prepared to teep that particular promise.


We are.


Doesn't add anything to it. On self funded retirees you've conspicuously failed to mention the fact that you're imposing a new 15 per cent tax on the income support base for allocated pensions and annuities and that is something of devastating potential for self funded retirees. As to the fairness or otherwise of the entire package, the Warren indictment is a devastating one of the misapplication of the package to

lower income households and there's many other points I could make to reinforce that if this bell would stop ringing in my ear.


The next question is from John Rolf.


My question is for Mr Evans. John Rolf, Bloomberg news. What are your views of the current company taxation regime and how do you plan to reform it in the future and could you specifically address the company tax rate.


We're prepared to have a close look at all aspects of business taxation. In our own review process we've introduced a number of business tax changes which I summarised briefly in my opening remarks. But we don't necessarily-believe that business tax change should stop there. We are interested in having a look at perhaps the biggest of all tax reform issues so far as company tax is concerned and that is the possible

integration into a single accounting regime of the accounting profits and the taxable profits systems which would have some implications for the company tax rate. We've got an open mind on whether or not the company tax rate could or should be brought down. The only context in which you could do that would • be by removing a whole raft of existing exemptions and concessions for business.


The truth of the matter is the business community is very divided itself on that and a great many people in the business community would prefer the continued availability of those selective intervention options so far as the tax system is concerned, rather than having an across the board lower tax rate. But we will be all ears on that particular issue, along with every other one. And I'll say what I always say to the business

community we're from the Labor Party and we're here to help you.


One of the things that the Labor Party did in relation to its tax announcements of course is to pick up a lot of what we'd put in our policy.


True, true.


And that's true, true. And that's not a bad thing. In fact if they implemented it that would be good. But one of the things that they picked up is the pay as you go system which they used to try and fund their package. Now it's important to realise that pay as you go raises revenue because it brings revenue forward. And the reason we have it in our package is that the cash flow detriment of bringing revenue

forward is offset bithe cash flow benefit of holding GST. For Labor not to have a GST but a PAYG system is to put a $2 billion cash flow detriment on all companies in Australia. Now that is going to be real hardship for Australian companies. Also the PAYG system which works off a quarterly return of sales and purchases works off the GST return. So in order to implement that Labor has to have all of the

accoutrements of the GST quarterly return with sales and purchases without a GST, which is a new form in relation to PAYG tax.


Next question is from Bruce Juddery.


Bruce Juddery, freelance. This is to both of the speakers. To start with I'm one of the people who are bemused that we are sitting here, and in my case paying my own good money, rather than employers, to hear two lawyers spruiking about economics. Could I ask you, seeing I write mostly on higher education issues, if either of you has read any of the new growth theory, and its application to national investment

and therefore growth in the economy? And what you understand of it. And secondly what is the position of the two of you on supplementation of university and TAFE wages which both parties have turned away from and thrown a lot of people out of work over in the last three or four years.


Supplementation of wages?


Tertiary wages, yes.


Wages and salaries.



Within the tertiary system?


In the tertiary system. Simon Crean knocked it back in 1995 and Senator Vanstone and Dr Kemp have done so in the last year or so and a lot of people have been put out of work and the system is being wrecked, as a result of bipartisan policy.


Well I can't pretend to be an expert on new growth theory. No doubt I'll become one when Mark Latham and others get into my ear in due course. But in so far as it's emphasising the need for investment in skill, education, training and so on, which I understand to be at least part of the repertoire there, obviously that's a central part of our own thinking, our own repertoire. When we talk about a strategy for jobs, we talk about a strategy with multiple dimensions, part of it is generating internal demand through appropriate budgetary and monetary policy to maximum sustainable growth levels. Part of it is maximising your external demand access through appropriate trade and industry policy and foreign policy. Part of it is appropriate industry and regional development policy which walks both sides of the

street between emphasising cost competitiveness as we always have been, and will continue to do, but on the other hand some selective intervention. But part of it also is the supply side emphasis on having the education, the skilling, the training, the work readiness, to enable inflationary bottlenecks to be avoided

and job opportunities not to be exported. The other part of our jobs policy, for what it's worth is a strong emphasis on outright job creation to ensure that the long term unemployed don't fall behind. That's the general approach that we adopt and I think a lot of it is entirely sympatico with the kind of theory you're talking about. In terms of supplementation for university academics, this is a very lively and difficult issue and I think we're acutely conscious of the way in which academic salaries have been stressed downwards as a result of the general pressure put on the education system by the $3 billion worth of cuts to education that's taken place over the last three years. We've done something to put the universities in a bettep position to deal with that situation in the future. It may be that we'll have to do more but that's something to be looked at in government. I can't give you any further or better response on that now.


I haven't read primary texts on new growth theory. I've read reports of it in newspapers and articles and the like. In relation to supplementation, we said I think in our 1996 budget that we would put together a fund which would be available for higher education salaries but would only be paid in relation to those universities where there had been restructuring in relation to wages and in relation to the wage system. The thinking behind it was that in relation to the universities, it was important, as had been occurring in relation to the economy generally — and this had been occurring under Labor and I pay them credit for this — that wages should be negotiated on the basis of productivity improvements. That was a system which

the Labor Party had begun to implement during its period in office, but there had been, as I am informed, quite some resistance in the tertiary sector in relation to that, and so that the monies were earmarked to be paid as part of the restructuring process. Now that was made clear in the 1996 budget. I believe that there have been some universities that have taken advantage of it. I also believe that if others were to take advantage of it they could still do so.


The next question is from Alan Thornhill.



Alan Thornhill from the Associated Press, Mr Costello. While it's very nice to be discussing rival tax plans here, the world economic situation is very serious — illustrated more than amply by rising levels of hunger among a nation of more than $200 million people to our immediate north. President Clinton is

urging the world to lead out of recession. What part can Australia play in that?


Do I take it that's directed to both.


Well, can I say that our Government has been very active in relation to the Asian financial crisis. We are, along with Japan, the only country that has volunteered to contribute to IMF packages in Thailand, in Korea and in Indonesia. And I pay tribute to Gareth and the Labor Party who supported our policy in relation to that, when it could have been made an area of contention. We have also indicated, and we're

one of the few countries in the world that has done this, that we are prepared to release what's called second tier funding as part of the package in relation to Indonesia. We made a commitment of $1 billion and we have said that we are prepared to draw down the first third I think it is of that upon certification of

the IMF. And there are only one or two other countries in the world that are prepared to do that. When the IMF program was being negotiated in relation to Indonesia, our Government, both the Foreign Minister and myself, were very active in discussions with the IMF and the US Treasury about the appropriateness of those packages. It was our view that a harsh fiscal regime, coupled together with the

removal of subsidies on basic food items in Indonesia, far from helping the situation, could in fact worsen it. That was the view that we put very strongly and we were not supported by many others in Washington. That lead to a final package which took away the requirements out of the IMF program for

the ending of subsidies on some of the basic staples and the implementation of a final package for Indonesia which I think has the capacity to be much better. In addition to that, we have been active in a group which was called the G-22, which I attended on behalf of Australia, to look at ways to stabilise the international financial system, and we have been active in plans through APEC to help those countries in our immediate region with basic needs in relation to the financial crisis. One of the things we are going to do is we are going to train bank regulators. We are going to offer training in relation to corporate regulators. Because some of these countries don't have adequate systems of bank regulation, nor of corporate regulation. Australia has expertise in these areas and Australia will lead the way in helping with training in those areas.


Could I just say on that, that we did strongly support the Government's own support for the IMF package and its efforts to civilise it and will continue to do so. We do believe that it's important for Australia to play a very active role in regional forums. In particular, in the critical task of improving the institutional structure — openness, transparency and accountability — both on the financial and economic institutions

side and also for that matter on the political side in the region, because that in turn is the key to the long term correction of the problems that have shown up. It does worry me a little that Australia has squandered a fair degree of its credibility and respect and capacity to be genuinely influential in this respect. So far as the regional bodies are concerned, it worries me that we seem to be playing no role at

all in recent times in holding together the APEC trade liberalisation agenda which I think is critical to hold together irilFese crucial times, with no Australian ministerial presence, for example, at a recent meeting in Malaysia, at which there was some serious backsliding by Japan and others from commitments that people were expecting to be made to advance that liberalisation agenda. So while there's no basic

quarrel and it is possible for Government and Opposition to agree about something in the region, we do believe the Government has been less than assiduous and less than effective in pursuing a number of these regional institutional strengthening options.



Thank you both. We have no more time for questions but I'd now like to invite Gareth Evans to make the first of the closing statements.


Do you want to go last?


I was last, now I go first. The first shall be last and the last shall be first. The, let me finish where I began by saying that the fundamental difference that's shown up again I think between Government and Opposition on this occasion as on so many others over the last two and a half years, is that while we both

are concerned about financial bottom lines, there is a fundamental difference between us in our respective preoccupations with the human bottom line. The preoccupation with the impact of economic policy on ordinary Australians. The well being of ordinary Australians, ordinary Australian families. Getting the

word jobs to escape Peter Costello's lips on this occasion has been a labour of Hercules, just as it's been over the last two and a half years. The impact of those budgetary decisions in 1996/97 was just devastating on the employment and unemployment environment. It did mean growth being reduced to around a percentage point less than it had been under the last three years of the Labor Government. It did mean a decimation of public sector job programs. It did mean an incapacity to meet that target, or get

anywhere near it, of reducing unemployment. And there's nothing in anything we've heard today which suggests that the Government understands that. Peter's mouth opens and shuts like a goldfish whenever he's asked questions. What are you going to do about jobs in the two weeks, the two years rather, before the great redeeming tax plan comes into effect. The tax plan that's going to not only solve unemployment

but everything else from halitosis to ingrown toenails as well. What is he going to do in that two years. What is the Government going to do? The truth of the matter is nothing. And combined witIrthat lack of recognition of the centrality of the issue of jobs and job security is to ordinary Australians is a terrible lack of understanding about the unfairness of the impact of its tax package and in particular the GST on

ordinar-y, battling low and middle income Australian families. The impact of the GST on household budgeting will be devastating. It's unfair in its conception, unfair in its execution. The Government's own income tax compensation does nothing to redress that unfairness, it simply reinforces it. These guys are not to be trusted in terms of any kind of commitment to real people. That's at the end of the day,

ultimately, what economic management has to be all about.


When Gareth was summarising his case then he gave a great deal of criticism of the Commonwealth's decision to balance the Australian budget and he criticised the decisions that we've made to take the budget out of the red and back into the black. Just as he did over a period of two and a half years. When he's asked, incidentally, what he would do about all of those budgetary decisions now he says he won't reverse them. He says that the Labor Party will not put aside the money to reverse them. How serious is their commitment when they want to say, on populist grounds, they're opposed to them, and that is their

advertising campaign. But they won't say in their financial presentations that they'll refund them. They wanted to say at the time that it shouldn't be done. And now they want to say that what Australia needs is a surplus as we go into the Asian crisis. They were wrong then. They're right now. We do need budgetary surpluses. But we wouldn't have got there if this Government hadn't taken the strong

leadership and the decisions to get there. And let me make it clear. When you want to put Australia on a path where it's paying it's way. Where we're bringing debts down. Where we've got interest rates lower. Where we're helping young people buy homes. Where we're helping small business in relation to their overheads and costs with low interest rates. You're doing that to help people. You're doing that to help people because you don't help them by taking money you don't have and running up debts which will be

paid back by their children.


By taking money you don't have to try and buy votes, but meaning higher interest rates for homebuyers by taking money that you don't have and running up interest rates and penalising small business. Good economic policy is about benefits for individuals, benefits for people, lower interest rates, a better tax environment, a stronger economy, more job opportunities, helping Australia's exports, creating a business

centre in the region. Sitting down and redesigning our tax system for the future. A new tax system for a new century with new opportunities. That's what this Government is all about in this election.


Well gentlemen thank you very much for your contribution today. Again I suppose it will be put down as a very civil occasion, even if your respective reputations in that regard mightn't have indicated. We'd like to add something to your sartorial packages as a memento of today's event, and if the exterior

packaging looks radically different, don't take-that as any reflection on your various policies. Thank you very much for joining us.


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