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Australian Democrat approach to economic reform and strategy in the Senate: address to Australian Business Economists, Sydney, 4 March 1999

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EMBARGO, 11am, 4.3.99



On July 11999, the De mocrats assume their rightful place in the balance of power in the Senate. I use the term rightful quite deliberately — we should have the balance of power now. At the 1996 election, over a million Australians, including 600,000 who voted for John Howard to be Prime Minister, voted for the Democrats in the Senate.


But, the defection of Mal Colston from the Labor Party denied us the role to which we were elected.


On July 1, my six colleagues and I will be joined by Aden Ridgeway from New South Wales and Brian Greig from Western Australia to become the largest ever third party contingent in the Federal Senate.


There has been much made of the Senate recently and without dwelling on the issue at length, it is important to recognise that this latest round of attacks is a deliberate, sustained and orchestrated strategy on the part of a Government which attracted its lowest Senate vote in about 25 years — 37%. I can think of no better way of articulating our response to these transparent and ongoing attacks than by quoting my friend, former Democrat Leader, Janine Haines. She made this point well during a debate in the Senate over a decade ago when she said:


“In fact, we are part of the governing body of Australia. This Parliament consists of two chambers. Both o f them have equal rights — or virtually equal rights — over legislation, and amending government legislation is as integral a part of being in government as taking the benches opposite is. We are as answerable for our actions as any other member in this chamber. We are part of government by dint of power and the position we hold in the Senate and we are prepared to stand on a daily basis and accept that.”


Today, I want to talk a little about the way the Democrats approach economic decision making in the Se nate. And I want to do that by using the example of tax reform.


The Australian Democrats were formed in 1977 from a group of small business people, environmentalists, civil libertarians and former activists from the Liberal Movement and the Australia Party.


They wanted a party that was internally and genuinely democratic, that stood by its principles, that would provide an alternative to the fossilised Labor Party and the ideologically driven Liberal Party. And that is how we have remained.


I am the only leader of a parliamentary party in Australia elected, not by colleagues after days of lobbying in person and on the phone, but by the ordinary members of the Australian Democrats across Australia. Our party’s policies and all positions of authority within the party are also directly balloted.


It can be a frustrating process at times, but as Winston Churchill once said, democracy is the least worst system of government yet invented. And, as former New York Governor Alfred Smith once- said, “All the evils of democracy can be cured by more democracy”. Not that I would wish to see One Nation ever struggle out of its current self-imposed turmoil, but in terms of true democratic structure, Pauline and Svengali Oldfield could well take a leaf out of the Democrat book.


Within the Parliament, all Democrat senators are entitled to exercise a conscience vote. But, in virtually all cases, we vote together. That is because as a party we meet every single day Parliament is sitting and work to achieve a common position on issues.


Again, no party has a process that is so democratic and inclusive.


The Democrats have long stood for openness in decision-making. I am particularly proud of the role we have played in opening up the process of law-making through the use of Senate Committees.


Major laws are all now subject to review by Parliamentary Committee, where the public has its right to have its say. The 17 tax bills, for example, which were rushed through the House of Representatives in a week, have been the subject of over 1500 public submissions to the Senate Tax Inquiry. The sheer number of submissions to the Tax Inquiry demolishes the Government’s claim that Australia’s business and welfare communities had all the information they needed on the tax package — those concerned about the environment had no information or input.


We take the role of scrutinising legislation very seriously. My colleagues are among the busiest of all parliamentarians, dealing with dozens of bills, committee hearings and delegations from industry in any given parliamentary session. I remind you that the Democrat team of 7 (soon to become 9) senators and staffers has to deal with the same amount of work that, for instance, the Government handles with the help of entire departments.


Before we decide our position on an issue, there are several important principles and processes which we bring to the task


Firstly, we recognise that a Government has the right to present legislation and to have it dealt with fairly and in detail. The Government, on the other hand, has to accept that the Senate has near equal powers under the Constitution to those of the House of Representatives and that the Senate is under no compulsion to do the Government’s bidding.


Secondly, we put an issue up against the template of Democrat policies and principles. Our policies tend to be written in general terms, but they do provide a very useful benchmark against which specific legislation can be judged.


Thirdly, we take into account evidence to and the findings of the Senate Committees. The Committee processes are immensely valuable devices in determining the real effects and impacts of proposed laws. The Senate Committee process should never be underestimated.


Fourthly, we take into account public representations from industry and community groups, from letters, faxes and e-mails and what we glean from any public debate on the issue.


Then we address our own very detailed and costed private analysis. I have a small team often researchers and analysts spread across 30 portfolios. We try to keep abreast of major international developments in policy and we adopt a rigorous analytical approach to policy issues.


It is a matter of concern and disappointment that, very often, our policy work is ignored by the media. A good example is the current tax debate. Prior to the election the Democrats published a detailed and fully-costed response to the Coalition’s tax package as well as that which passed for the ALP’s tax package. In very large part our work and prognostications have been vindicated by submissions to the Senate Tax Inquiry. It is obvious, however, that some media commentators have yet to read it.


With these sources of information and guidance, I say confidently that the Democrats have done a pretty good job of rigorously scrutinising laws, and making them work better. The Australian people seem to agree with my assessment. They elected Democrats to perform that role in each of the last nine Federal Elections, making us the most successful third party since the formation of the Country Party.


But what does all of this mean for tax reform?


The Democrats accept that the Coalition has a majority in the House of Representatives and has the right to present legislation. The Government also has a right to have its legislation dealt with fairly and in detail. This we propose to do although we do not accept the Government’s argument that it has a mandate to have every minute part of its tax package passed without comment or amendment. Not only are there several mandates operating here, but we have to remember that 51.3 % of the population voted for Kim Beazley to be Prime Minister, while 62 % chose a party other than the Coalition to represent them in the Senate.


The Democrats have balloted our members on a new tax policy. We are now committed to broadening the indirect tax system to include services, but we oppose changing the tax mix. We are also committed to a tax system that is progressive, internationally competitive and environmentally responsible.


It was the Democrats who instigated and negotiated to set up the most comprehensive Senate Committee review process of this most comprehensive overhaul of our tax system. The first report of the Senate tax Committee was released two weeks ago and looked at the overall economic effect of the tax package. There are four more reports due by April 19.


Industry, community and environment groups have welcomed the opportunity to contribute to the process, with dozens already appearing as witnesses before those Committees.


And, of course, my research team has been quietly working on testing every proposit ion, probing every strength and weakness of the arguments presented.


I don’t yet know exactly what the final form the modifications we will seek to the tax package will be. But, I have given a commitment to be ready to start debating the 17 tax bills when the Committees report on April 19, and I’ll keep that commitment.


What have we found out so far?


Well, the Government has been caught out telling a few untruths about its tax plan during the election campaign.


The Coalition said the GST would generate jobs. Yet, Treasury now tells us that no modelling was ever carried out on the impact on employment.


In $17 million of publicly funded advertisements the Coalition claimed that everyone

would be better off. Yet, six university professors of economics and the Government

Statistician have told the Senate that the Government:

• used the wrong data,

• deliberately underestimated the impact of the GST on low income earners,

• overstated the impact on high income earners.


And, the Coalition claimed that zero-ra ting food would lead to the package unravelling. Well, not so according to Chris Murphy and Peter Dixon, the two economic modellers commissioned by the Senate Committee.


They found that a GST that excluded food would deliver essentially, the same level of GDP growth, consumer welfare and investment and export gains as a GST with food. But, it would do so with much lower inflation, and with a much less regressive tax system.


Indeed, Peter Dixon’s modelling showed that taking out food would generate an extra 8-12,000 jobs in the short-term by eliminating much of the harmful tax mix change —the change between direct and indirect taxes.


Both acknowledged that taking out food would add to compliance costs. However, the evidence from overseas and the growing computerisation of business accounts suggest


to me that these concerns have been overstated. The compliance cost of the British VAT, which excludes food, is actually lower than for our current wholesale sales tax system. In any case, for the Democrats, the task will always be to balance simplicity and equity.


Indeed, if 23 out of 27 OECD countries with VATs have found a way of exempting or concessionally taxing food, why is it so hard to do in Australia?


To our mind, the most significant finding of the first round of the Senate Tax Inquiry was that the Government senators finally conceded that taking out food would still allow the GST to deliver the same level of macroeconomic benefits to the economy. A big concession, I might say.


Having proven that there is no strong case for either taxing or not taxing food on efficiency principles, the next stage of our Inquiry will focus on the equity principle, That is, what is the effect of leaving food in the GST net on different household types.


We know that it will hurt low income earners most, but we have now commissioned Neil Warren and Ann Harding to tell us by exactly how much.


Many economists argue that we should simply increase the level of social security compensation to ensure that no-one is left worse off. And, I agree, that is certainly technically possible.


But, as Professor John Neville said in his report for the Anglican Church on the GST:


“Compensation packages are always likely to be fragile and are usually inadequate. Moreover, they tend to be er oded over time and some needy groups would receive no compensation at all.”


Dr Neil Warren, who is from the same university, but unlike Professor Neville is a supporter of a GST applying to food, has conceded that politicians only have themselves to blame for the lack of faith in their assurances on compensation:


“It is therefore incumbent on politicians to overcome this lack of faith in the guarantees and to implement an approach which is capable of restoring public confidence in their assurances.


But, I see no evidence of that. I was entertained a few Sunday’s ago by Peter Costello on Channel 9 saying that the Senate is the best guarantee that the compensation will never be cut. At the same time Peter Reith was appearing on Channel Ten calling for reform of the Senate so that it couldn’t interfere with the business of Government. Never mind that the Senate is a part of government according to the Constitution —that doesn’t suit the drive of the Executive for absolute power.


What I am worried about is a repeat of the New Zealand experience, where the compensation for the GST lasted only four years and was swept away in cost-cutting welfare reforms. In the light of this it gives me no confidence that Peter Reith has flagged we lfare reform as the next big agenda item after tax reform in what he is hoping will be the Government’s third term.


And, in addition, many people are outside both the tax and the welfare systems and therefore can’t be compensated at all for a new 10% tax on the basic necessities of life.


I’m sorry but I just don’t believe that the compensation package for the GST will survive or be adequate for all. The policy consequence of that for the Democrats is that I want to make sure that the risk of it not surviving is reduced as much as possible. The best and most effective way of doing that is not taxing food. I invite you to consider the political improbability of any government introducing a GST on food once the package has passed with food out of the net.


While on the subject of Peter Reith and his list of 101 good ideas, I want to signal that I agree with a few of them. Predictably, they are the ones he rejected.


I am particularly enthusiastic about the potential for wage tax trade-offs and eliminating poverty traps as a means of encouraging jobs growth. I found it very galling that Peter Reith rejected the very strong case put by the famous “five economists” in a letter to the Prime Minister advocating a wage/tax trade-off. Mr Reith dismissed it as — and I quote - “taking our eye off the main game, which is labour market reform “.


I read that as saying that Peter Reith is more interested in taking on the unions with masked men, dogs and locked gates than actually creating jobs.


The one thing that Australia’s recent economic history tells us is that wage/tax trade-offs DO create employment. 1.6 million new jobs were created between 1983 and 1990.


Today I am calling for a Five Point Action Plan to use tax reform to generate jobs; starting immediately.




I call for the tax cuts for low and middle income earners to be brought forward a year to 1999 and for them to be paid for out of the swelling Budget surplus and/or by closing some obvious loopholes. The tax cuts, with a wage offset enforced through the AIRC, has the potential to generate around 45,000 jobs this year.




I call for action to close poverty traps, starting this year rather than next year. This can be done by reducing the top taper on Family Payment and Unemployment Benefits. Many eminent economists, including Chris Murphy and Geoff Carmody, see this as the real key to generating jobs in the tax package.




I call for the abolition or phasing out of payroll tax to be put right up near the top of the business tax agenda. Why on earth are we talking about cutting taxes on fossil fuels, on profits and on capital gains, but leaving taxes on jobs?


Modelling by the Centre of Policy Studies at Monash University suggests that, for example, abolishing payroll tax to be paid for by higher taxes on fossil fuels could deliver 60,000 extra jobs, a 12% reduction in greenhouse gas emissions and a 0.2% boost to GDP




I call for food to be exempted from the GST. The cost of that - $4.5 billion — could easily be met by reducing the $6.8 billion of tax cuts earmarked for the top 20% of taxpayers. As I said earlier, according to Peter Dixon, this measure would generate an extra 8-12,000 jobs in the short-run by reducing the economically harmful tax mix change. And this would still leave high income earners with about $30 per week compared with $10-15 for low and middle income earners.




I call for the income tax scales to apply from July 2000 to be rejigged so as to provide another tax cut to low and middle income earners next year as a further wage/tax trade-off round.


This new round of tax reductions can be funded by a more concerted attack on tax loopholes than the Government has been prepared to sign up to.


All of these ideas, I wish to emphasise, are well sourced. They are based on the analysis and modelling of some of Australia’s most eminent economists.


Yes, the Democrats do take economists seriously, especially when their work is practical and geared toward real life problems rather than theoretical and ideological attachments to idealistic, competitive free markets that just don’t or won’t exist.


I am very pleased to have this opportunity to speak to this group today because you are influential.


And so I urge you, don’t close your minds to alternative viewpoints. You may not agree with the ideas I’m promoting, but they are all drawn from sound economic analysis and real appreciations of the social, environmental and political consequences of economic policies.


If you want a GST and the economic benefits that flow from it, then join me in my quest to make it more saleable to the Australian people; to make it fairer, more jobs friendly, less regressive and a bit more environmentally sound.


The Democrats have taken a great political risk in staying in the tax debate. We did not walk away like the ALP, muttering about orange juice and caviar. We did not present some cascading 2% tax like the dearly departed Ms Hanson. We can see the benefits of tax reform, but we can also see the costs. We want to maximise the former and minimise the latter.


In conclusion, I just ask you to have a close look at what we are proposing. Unlike the Government’s package, our proposals are based on research and accurate modelling. Hopefully, once you look past the hysteria of some of the less intellectually rigorous media commentators, you will at least acknowledge our work and understand our determination to deliver the best possible outcome for Australia and all Australians.


Thank you.