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Challenge and change: address to National Conference of Australian Eagle Insurance, Adelaide

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Good morning Mr Chairman, ladies and gentlemen.

Thank you for your kind invitation to participate in your conference and contribute a few thoughts on the theme of challenge and change in the insurance industry. I must say your theme is most timely because there has probably been no other time in history when the challenges you face have been greater and the need for change more urgent.

The central theme of my remarks today is to stress the importance of governments making sure that the whole economic environment is favourable to investment, innovation and productivity. You - as individuals, as firms and as an industry - will do best when Australia as a whole is performing to its potential. In the Coalition we have developed a blue-print to achieve the right economic environment: that is, policies to overcome the malaise which has gripped Australia, policies to overcome the causes of lack of competitiveness, low profits and falling living standards. Policies to get off the backs of firms and individuals, and encourage them to reach their potential.

Our policies are not industry-specific. In contrast to Labor, we are not about doing special deals with each special interest group around the country in return for political favours. Rather, we see your industry as an essential part of Australia and most of your industry's problems are due to deep-seated problems in the Australian economy.

I will outline our policies for superannuation and make some observations on how the Goods and Services Tax will apply to your industiy, but these are all overshadowed by the imperative that Australia's fundamental economic problems have to be fixed up if you are to have any future. As a future government, our job

is to correct those problems - to get the economic environment right. The rest is up to you and the skill of individuals to make the most of it.

What is wrong with our economy?

Unfortunately, the sorry state of our economy today is not only cyclical. It is true that we are in the midst of the most severe and prolonged recession for 60 years, but the longer term perspective shows that there are some basic, underlying problems to solve.

It is salutary to recall that at the time of Federation, in 1901, Australia ranked amongst the highest in the world in terms of per capita income. Even in 1960 we



ranked fifth. Today we don't make the top 15. If present trends continue we won't even be in the first 25 by the year 2000, just 8 short years away.

According to OECD estimates, over the period 1979 to 1990 labour productivity in Australia grew on average by only 0.9 per cent per year, compared with an OECD average of 1.5 per cent. That is, our performance was only 60 per cent of other developed countries. No wonder we are slipping.

Company profits have collapsed, so the pool of funds for investment has dried up. To illustrate that point, the profit share of GDP - that is, gross operating surplus of companies less tax and interest paid as a proportion of non-farm product at factor cost - has fallen consistently over the past seven years and is now at its lowest point for more than 25 years.

With the shrinking of profits, investment has either been curtailed or financed from abroad. As a result, our net foreign liabilities have blown out to some $180 billion and the cost of servicing those liabilities has become a major drain on our economy.

As an inevitable outcome, Australia now has some 1.5 million people either unemployed or underemployed. The economic and human waste is scandalous.

Why do we have declining living standards, high and persistent unemployment, soaring and soaring foreign liabilities relative to our international competitors?

The essence of Australia's economic problem is that because of poor productivity we cannot generate enough income to service our foreign liabilities without either selling the farm or taking a drop in living standards.

To overcome this problem requires radical change. In economic terms, the basic task is that, in order to stabilise our foreign liabilities as a proportion of GDP, we must shift at least 4 per cent of economic activity into the tradeables sector. That translates to a 25 per cent increase in net exports. Put another way, we have to

increase our net exports by at least $17 billion. Achieving that target will require a massive increase in productivity in order to become competitive on world markets. A change of that magnitude has never occurred before. It can be done. But not unless radical changes are made. A 25 per cent increase in net exports will only be possible with huge increases in savings, investment, productivity, competitiveness

and private sector growth.


Above all there must be a sea-change in attitude. A whole new psyche. A total break with our traditional belief in the role of governments. And an understanding of the things that governments cannot do.

The fundamental aim of any reform is to make Australia a more attractive place in which to invest. Without investment there is no growth and no employment. The evidence of that is a stark, but sad, reality for many Australians today. Indeed, at present, total investment in Australia is at its lowest level in over 30 years. Not a good place to start, but we have no option.

The current bleak investment outlook is not simply a cyclical phenomenon. It is the result of deep seated problems in the Australian economy which have discouraged business from making major capital investment in Australia. These problems include an industrial relations system which fails to maximise productivity, a taxation system which discourages incentive, high real interest rates (leading to an uncompetitive exchange rate), bureaucratic and special interest group obstacles to project development - particularly environmental and land rights - a plethora of rules and regulations which inhibit innovation, and structural inefficiencies, most notably in transport and the waterfront, which impose significant cost disadvantages

on Australian exporters.

These are all factors which have caused our labour productivity to have grown at the rate of only 60 per cent of our international competitors, and our relative living standards to slip.

Indeed, one can only question whether the Government is really serious about tackling our devastating unemployment situation when it continues to permit, and in fact builds on, those enormous inhibitions to investment, productivity and income


A further major concern is that Australia suffers from an attitude of dependence on governments to fix things up or find a way out of problems which keep piling up. Governments or their agencies have, of course, done little or nothing to change this attitude because it is in many ways the underpinning of their own positions of power. However, for the rest of us, leaving the solution to governments and their associated coercive powers is the road to poverty and misery.


What the Coalition will do about it

In contrast to this historical dependence on governments, I would suggest that the future of Australia rests with the innovative spirit of those individuals who are willing to "have a go" - discover new opportunities, try new ideas and be able to reap the reward for getting it right. Then others will follow. If people are free, they flourish - and so do their communities and the nation.

The key to growth and prosperity is economic freedom - the right of people to buy and sell, invest, improve property and freely contract with one another without needing permission from government. Free markets work because individual people, cooperating peacefully and voluntarily through markets can achieve much more than politicians and bureaucrats using compulsion and direction.

If each firm wants to raise productivity, become more competitive, expand and give its people a future, it will reward the innovators. This requires a market-based incentive structure. It means expanding individual freedom and reducing interference from government.

The role of government

Governments should limit their involvement to setting and enforcing a few basic rules for all individuals and companies. The role of the Government should be open, uncomplicated and directed at establishing a climate which encourages saving, investment, innovation and growth. Investors and risk-takers should be permitted to keep the rewards of their judgement - or luck. Governments should not intervene to favour one industry, or one group of investors over another. Nor should they

intervene if competition in the market forces down prices and causes a firm or a segment of the market into losses. And in particular, governments should not themselves try to run businesses.

The appropriate role for government is to get the overall environment right. Its role is to act in the common, long term interest of the people of Australia by promoting sustained growth as a basis for improving the long term well-being of the

community. That means, amongst other things, keeping competition alive and effective and creating a stable and reliable economic climate. Economic policy should be directed to those goals.


Experience in other countries and economic analysis have shown that government can do much to stimulate investment and facilitate the development of competitive industries. What should governments do? They should concentrate on ensuring:







legal and constitutional protection of private property rights; freedom of contract; clear rules of liability (and application of those rules); freedom to enter and leave the market place; a stable currency and confidence that it will remain stable; and a predictable policy framework in which investors can have confidence that the rules are long term and that governments will not favour some players or penalise others for political purposes.

These conditions play a key role in making a nation's industry internationally competitive and attractive to internationally mobile capital, knowledge and firms.

This is what our Fightback! package of economic reforms is all about.

On coming to Government we will introduce 20 major reforms covering all key areas of activity, including health, education, social security, housing, transport, development, industry assistance, the labour market, taxation and so on.

Policies to raise domestic savings

One of our key policy reforms is to introduce a comprehensive national savings strategy. Savings in Australia have collapsed under the Labor Government - that is one of the main reasons for our economic demise. Without savings there is no investment, no growth and no jobs. The evidence of that is clearly before us right now. Hence, on coming to Government, our top priority will be to restore the level of national savings. Our task is to replace a spending culture with a savings culture.

In the public sector we will - as outlined in Fightback! - contribute to national savings by running Budget surpluses. Instead of plundering the savings of individuals, we will move the public sector to a position where all of its own

investment needs are covered within the public sector itself.

For the private sector we will introduce a range of measures to encourage savings which:

are targeted to those who may change their saving behaviour and attitudes


to the benefit of themselves and the wider community;

- are cost effective relative to other forms of assistance, including the age pension;

- are directed at improving the fairness of the system by targeting public assistance to those most in need; and

- avoid the need for compulsion.

There are two main elements to our savings strategy:

- the Tax Free Savings scheme for shorter term savings; and

- the new arrangements for superannuation.

* Tax Free Savings scheme

Briefly, the aim of this scheme is to encourage greater self-reliance by broadening the range of savings options for Australians, particularly those on lower incomes who may not be able to take full advantage of other savings mechanisms such as superannuation. The scheme aims to influence the saving attitudes of average Australians. They will be encouraged to reduce their reliance on debt and to save

for their own housing, education, health and other needs.

It will work by allowing a rebate of 30 cents in the dollar on interest earned on new savings up to a limit of $1,000 a year for single taxpayers and $2,000 a year for married couples, regardless of other income.

That means that for people with taxable incomes up to $50,000 per year, interest income on new savings will be completely tax free.

People on incomes of more than $50,000 per year will receive a tax rebate of 30 cents in the dollar on income from new savings.

* Superannuation

Superannuation is under threat from Labor. Since coming to office Labor has turned superannuation into an extremely complex, unfair and unattractive system,


particularly for those on low and middle incomes.

Labor has an insatiable drive to meddle. When it came to office there was just one tax on superannuation - now there are six.

Labor is allowing superannuation to be rorted by the wealthy via massive tax concessions. High income earners receive 5 times the tax concessions of low income earners.

By making superannuation compulsory according to the rigidities of awards, an estimated 70,000 new jobs have not materialised. In other words, the very people who were supposed to be assisted by compulsory superannuation have either lost their jobs or did not get jobs. Such is the perversity of Labor's policy.

And now Labor is planning to get its hands on superannuation funds to serve its political purposes. When the Prime Minister talks about using superannuation funds for so-called 'national interest' investments, that is just Newspeak for getting the Government re-elected.

Government direction of superannuation funds is a clear part of Labor's agenda. When Mr Keating was Treasurer he promised his union bosses that superannuation would guarantee their political power. He said that if the trade unions at any time were placed in a more hostile political environment - presumably referring to a

Coalition government - they would face this having a significant controlling element in the $600 billion pool of superannuation savings. That ties in with the ACTU's blueprint (Australia Reconstructed) for all superannuation funds being required to

make up to 20 per cent of their future income available for Government schemes.

Watch the February 26 statement.

In clear contrast to Labor, we will simplify the superannuation arrangements, remove compulsory employer funding, and make the system fairer, incentive driven and based on freedom of choice.

The main features of the Coalition's superannuation scheme are:

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


the employer's contribution will be taxed in the hands of the fund at the


individual's marginal tax rate less the 25 per cent rebate;

the level of employer contributions already in place at the time of the next election will be retained, but any further increases will be voluntary;

people over age 45, who have made minimal contributions in the previous five years will be allowed to 'catch up' by contributing a maximum of $30,000 in one year and claim a maximum rebate of $7,500. This will encourage more

people into long term retirement planning.;

tax on lump sums will be abolished, but the amount which can be taken out as a lump sum will be limited initially to $300,000 (indexed so that it grows in line with future earnings), thus encouraging those with high payouts to take annuities as a stream of income in retirement;

we will investigate making a clear break with past tax rules by extending the abolition of lump sum tax to all accrued lump sum benefits, irrespective of whether pre or post 1983 entitlements;

the tax on superannuation fund income will be increased from 15 per cent to 25 per cent, while still maintaining the current dividend imputation credit system;

the tax free status of investment income generated by funds paying annuities will be maintained;

the Reasonable Benefits Limits (RBLs) scheme will be abolished - it is redundant because of the cap on tax concessions on contributions;

a new system of Retirement Savings Accounts in financial institutions will be introduced, thereby extending the range of savings options for retirement planning;

individuals will be permitted to make tax rebatable contributions on behalf of their non-working spouses. This recognises the real but unmeasured contribution of non-working spouses and removes the artificial constraints imposed by Labor's narrow occupational superannuation scheme;

young Australians will be allowed to use their superannuation to borrow funds to buy a home, th u s adding flexibility to th e '


savings/investment/provision for retirement options available;

a range of more flexible annuities will be allowed, permitting greater choice in meeting individual needs, whilst at the same time ensuring that minimum criteria for security are met;

individuals will be free to choose the superannuation fund to which their contributions are paid (in contrast to the present system of compulsion);

employers and employees will be encouraged to enter into voluntary agreements including the payment of appropriate superannuation contributions beyond the minimum level;

access to the age pension will be restricted for those in receipt of lump sums. Reducing the practice of 'double dipping1 will result in much better targeting of assistance to those in genuine need;

the preservation age will be raised to 60, except in cases where industrial awards and statutes (defence personnel, for example) require retirement at an earlier age;


all superannuation contributions from employers will be vested immediately;

the Commonwealth government unfunded superannuation schemes will be progressively converted to a fully funded basis; and

there will be regular consultation with the industry to ensure effective implementation of our policies. This will mark the end of Labor's abysmal practice of legislation by press releases - followed by the inevitable patch-up - which has caused so much confusion and misunderstanding for fund

managers, superannuants and retirees alike.

These are big and very important changes. They are also a challenge to industry to implement in the most effective way. They present great opportunities.

Whilst being firmly committed to the principles outlined, we recognise that superannuation is an extremely complex subject. Because of this, we welcome - and have indeed commenced - discussion of the details of our proposals with industry

before making final decisions on all aspects.


The insurance industry and the GST

Mr Chairman, turning briefly to the Coalition's policies as they relate to the insurance industry, apart from stressing the importance of operating in a dynamic and growing economy and the policy we have set ourselves of not interfering in the form of industry-specific 'plans', I would point out that the insurance industry -

along with other financial services, residential rents and all building construction - will be exempt from the Goods and Services Tax (GST). This means that no GST will apply to the final goods and services being sold, but any GST paid on business inputs will not be refundable. In other words, there will be a GST on inputs only. That includes accounting, legal fees and the cost of security services incurred by a firm, as well as furniture and so on. But there will be no GST on insurance premiums.

Furthermore, insurance services sold to non-residents (that is, exported) will be zero-rated. Which means that GST is not payable and a full refund is allowable on any GST paid on inputs to those exported services.

As with superannuation, we will consult widely with the business community on the administrative and technical aspects of the GST prior to making final decisions on the precise details of its implementation on 1 October 1994.

This close involvement of the business community and its professional advisors at this stage of planning will ensure that the most efficient, practical and simple system is put in place.

As an integral part of this process we have established a full-time Goods and Services Tax Planning and Coordination Office headed by Sir William Cole. The Office will:

* consult with the business community on all administrative features of the GST consistent with our announced policy;

* receive submissions and comment on the implementation of the GST, make recommendations on all aspects of the implementation of the GST, and prepare a draft of the necessary legislation.

The Office will be maintained after the Coalition wins government. It will conduct an on-going educational campaign, respond to inquiries and cover any special transition arrangements.


Current economic issues

Finally, there are some important developments in the economy which will affect you over the coming months.

Market analysts and private economic forecasters have recently estimated that the Budget deficit for 1991-92 - which was planned to come in at $4.7 billion - is likely to blow out to $7.5 billion to $8 billion, and that does not take into account any further blow-out from new expenditure to be announced on 26 February.

For the Government to bring the Budget in on track there would have to be a turnaround in the Budget balance between the first half of 1991/92 and the second half, of around $17 billion. Nothing remotely like that has ever happened before. The largest previous turnaround in the Budget was $12.6 billion, which was in the rapid recovery of 1986/87, and not even the Government is forecasting a recovery of that magnitude.

Even to come in with a deficit of 'only' $8 billion would require a $14 billion turnaround between the first and second halves of this financial year, still greater than the previous record.

The economy would have to boom at an unprecedented rate for the Government's Budget forecast - now revised at "a little over $5 billion" - to be accurate. Indeed, if such a strong economic recoveiy is underway or even expected, why is the Government about to announce on 26 February the single largest deliberate relaxation in fiscal policy in nearly a decade? (There has, of course, been an

enormous unplanned $13-$ 16 billion relaxation over the past two years.)

The increase in the Budget deficit will have to be funded by additional sales of Government bonds, that is, by plunging further into debt. Schroders calculate that the Government will require an additional $3 billion to $3.5 billion in funds compared with the planned program for 1991/92. If this were all met through additional bond tenders the total requirement would increase to $14 billion, leaving about $6 billion to be raised in the last four months of the financial year. That will be extremely difficult, if not impossible, given the current weakening in the bond market. So the Government will have to resort to issuing Treasury notes and running down cash balances.

Either way, it is obvious what is going to happen. Bond prices will fall, interest rate will rise and the short-term pump priming will soon be swamped by higher inflation,

a choking of activity, loss of confidence and more unemployment when the bills come in. That is grossly irresponsible of the Government. Such is the cost of political ambition. The tragedy is that it is average Australians who will bear the cost.

So the message is he careful, and prepare for higher inflation and higher interest rates'.

If the Government wishes to stimulate the economy through accelerated depreciation allowances and increased spending on public works which improve the efficiency of services to business, it should do so by other cuts to spending.

Better still, remove the $20 billion burden of business taxes as proposed in our Fightback! package of reforms. If Mr Keating did adopt the full Fightback! package we would support him. It is the only way ahead for Australia. I'm not holding my breath, though. Are you?