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Australian Industry Group, Melbourne, post-Federal Budget breakfast, 12 May 1999: address.

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Senator Nick Minchin

Minister for Industry, Science and Resources



Post-Federal Budget breakfast

12 May 1999


Address to the Australian Industry Group, Melbourne

Thank you for that introduction, your keen interest in this year's budget and of course yo ur suggestions on how it could be improved.

I will comment on that in due course.

Budget strategy

Our Budget strategy consists of six elements:

  • delivering our election commitments;
  • developing an economic framework which helps families by keeping home mor tgage rates low;
  • delivering increased services to rural and regional Australia;
  • building up the nation's educational and research capacity'
  • keeping australia strong; and
  • keeping the Budget in surplus.

The Government has been driven by the need to get the Budget into surplus and reduce the level of Government debt.

Even though it is only three years since we came to office, it is easy to forget the fiscal shambles we inherited.

Paul Keating left us a Government spending $10,000 million more per annum than it was earning.

In Labor's 13 Budgets , only four were in surplus (from 1987 to 1991).

And the sum total of these four years of surpluses was completely wiped out in the deficit for 1992-93 alone.

Labor's last five Budgets were all in deficit, adding $70 billion to Government debt in just five years.

Labor's last two Budgets , when Kim Beazley was Finance Minister, added $23 billion to the national debt.

The Federal Government debt was $16 billion when Labor came into office and was $96 billion when they left.

Servicing that debt is costing taxpayers a fortune.

The interest bill alone in Labor's last Budget was $8.5 billion per annum -- nearly as much as Federal Government spending on education or defence.

The $8.5 billion interest bill on Labor's debt was as much as our whole economy spends on R&D every year.

That's the fiscal framework we inherited.

Our plan was clear -- stabilise this debt, then halve it in five years.

Our first Budget kickstarted this process and Labor fought it all the way.

Our second Budget consolidated this and our third Budget paved the way for an expected surplus in 1998-99 of $3.1 billion.

This Budget is about maintaining our discipline, and protecting the surplus.

This Budget delivers on all our election promises and delivers a s urplus of $5.4 billion.

This means we can repay more debt.

By the end of 1999-2000, Government debt will be down to $50 billion -- down from the debt of $95 billion we inherited.

And if we can proceed with the sale of the other two-thirds of Telstra, Government debt will be completely eradicated by 2002-03.

This would be the first time in the whole history of a federated Australia that there is no Government debt.

This points to another significant difference between our fiscal approach and Labor's.

Despite them being born-again defenders of public ownership of assets, in Government they had a pretty good record of privatisation -- the Commonwealth Bank and Qantas being good examples.

But what did they do with the proceeds of sale?

Did they plough the proceeds back into debt reduction like we have with the first third of Telstra?

No -- they sold the family silver just to pay the bills.

On the other hand, our commitment to debt reduction through privatisation and building of surpluses means we have taken the pressure off interest rates.

This means we are even better protected from external shocks such as the Asian financial crisis.

This means the Federal Government is contributing to national savings.

And this means maintaining confidence in the Australian economy.

How was this surplus achieved?

Strong economic growth has obviously helped revenue.

But we have not gone the lazy route of upping taxes.

This Budget does not increase company tax or income tax or WST or petrol excise.

Rather, it's the result of continued vigilance and hard work by the Expenditure Review Committee to keep outlays down.

When we took office, Government spending was almost 27 per cent of GDP.

This Budget takes that down to 25.3 per cent.

So in a nutshell, that's our Budget strategy -- strengthening the macro side through a significant surplus, delivered through discipline and growth -- not tax hikes.

Forecasts - economic growth

The Budget is also important for the forecasts it contains of key indicators.

The forecast for economic growth is three per cent after the growth of 4.25 per cent we have had in 1998-99.

This fall due to the eventual effect of the Asian crisis.

This means our growth will still be above world average of 2.5 per cent.

And it means the economy's uninterrupted expansion will continue into a ninth year.

Australia now has the best economic conditions since the 1960s.

This means we have come through the Asian crisis without even dipping below our long-term growth trend.

The US economy has been in continual growth for the same period and the comparisons are very similar between our countries on a range of indicators, such as continuing low inflation, which is forecast to be two per cent, well within the Reserve Bank's target range. We also share the scenario of continuing current account deficits with the US.

Current account deficit

Our current account deficit has been at 5.5 per cent of GDP and is forecast to ease to an average of 5.25 per cent over 1999-00.

Australia has traditionally run current account deficits, as investment opportunities have exceeded domestic savings.

Remember -- there were three current account deficit peaks of over six per cent of GDP under Labor. These were at times of high inflation and high interest rates. The only way they could manage these blowouts was driving the economy towards recession.

The current account deficit we are experiencing presently is the side-effect to a booming domestic economy coinciding with major export markets in recession and commodity prices at a 20 year low.

We are not going to go the path of the ALP and drive growth down. With interest rates and inflation low, we can keep the domestic economy running strongly and manage the deficit.

By maintaining a surplus, we have strengthened domestic savings.

Recovery of overseas markets and of commodity prices will see a gradual easing of the current account deficit.

But the best way to attack current account deficit is by getting the domestic cost structure down, so our exports and import replacement industries are more. This means we have to continue with tax reform and industrial relations reform, which I will talk about later.


The one indicator where we are out of sync with the United States is of course unemployment -- while eight years of growth has us at 7.4 per cent, the United States is close to four per cent.

Or to make another comparison, New Zealand is just emerging from recession, but they have lower unemployment than us.

We have had some success in reducing unemployment. We have created 400,000 jobs.

On Monday, ANZ job advertisement figures increased again -- up 15.8 per cent from a year ago. This was the highest number of j ob ads since April 1990.

But we expect unemployment to stay constant, given the fall in economic growth. This unemployment rate is still unacceptable. It reminds us we still have a major challenge in freeing up our labour market.

Maintaining youth wages and cleaning up our unfair dismissal rules are just two of the battles we have with a Labor Party that is unprepared to stand up to the union movement and support job-creating proposals.

While Peter Reith has been out there working on options for further reform, Labor can do nothing more than support the status quo.

We will continue to support labour market reform, as it means workers and employers can share the fruits of higher productivity.

Portfolio Budget Measures

That's the macro-framework -- continuing growth, continuing lower inflation and creating the right climate for low interest rates.

When you look at micro situation, there are a number of measures which impact on business directly or indirectly. Some are in my portfolio, some are in others.

These specific measures are all consistent with the detailed industry policy framework we laid down in our major 1997 industry policy framework, Investing for Growth.

The general focus is on strengthening the competitive advantage of Australian industry by reducing costs. Specifically, we have identified the three key drivers of growth as promoting innovation and encouraging investment and exports.

And each of our sectoral policies addresses at least one of these drivers.

All-up in my portfolio, we are spending $1.25 billion in 1999-2000 on business support to assist you to innovate, invest and export. This includes $355m on the R&D tax concession.

R&D Support

This Budget continues our support for business R&D. In 1999-2000, there will be a seven per cent real increase to $664 million in our support for industry R&D -- that is funding for the R&D tax concession, R&D Start grants and other innovation support.

This seven per cent real increase follows an increase in 1998-99 of 22 per cent in real terms in our support for business R&D.

This did follow a fall in our expenditure on business R&D after we had clamped down on syndication in our first Budget.

But in this financial year and next, Government support for business innovation is increasing rapidly.

In terms of expenditure on public sector support for research, we are in the top five countries in the world. So we are a Government which recognises innovation will be a major driver of growth.


An example of this is biotechnology. The 1999-2000 Budget has allocated $17.5 million for a comprehensive new biotechnology strategy.

This national strategy will ensure Australia captures the benefits of this emerging technology. A Ministerial Council, which I will chair, will oversee this strategy and the new office of Biotechnology Australia, which will coordinate Commonwealth biotechnology activities, will be set up in my Department.

An independent statutory office of regulation will ensure an effective enforceable system of regulation. The Government's biotechnology agenda will include a public awareness program on biotechnology and gene technology, more effective management of intellectual property and improved access to holdings of gene and biological resources.

Shipbuilding package

Shipbuilding is a fine example of a niche manufacturing market in which Australia has excelled.

The Budget has allocated $68.8 million to encourage the shipbuilding industry to be even more innovative and internationally competitive.

The package includes extension of the Shipbuilding Construction Bounty at a reduced rate and for a limited period, matching the assistance provided in the European Union. The bounty will continue until 31 December 2000.

A five-year Shipbuilding Innovation Scheme -- to begin on 1 July 1999 -- will also encourage product R&D and design innovation in the industry. Eligible shipbuilders will receive assistance at a rate of 50 per cent of innovation expenditure for up to a total of two per cent of eligible production costs.

This will assist companies such as Incat in Tasmania and Austal in Fremantle, which are pioneering development of aluminium fast cargo ferries. These two companies alone exported ferries worth $350 million last year.


The Printing Industry Competitiveness Scheme is another 1998 Government election promise which is being fulfilled in this Budget.

The Scheme is designed to develop a stronger, sustainable printing industry. It will address the disadvantage Australian book printers face as they pay duty on paper while competing imported books are tariff-free.

Funded at a total of $20.6 million over the next four years, the Scheme became effective from 1 January 1999, meeting the Government's election commitment.

Value Chain Management Program

The 1999 Budget provides more than $3 million for the new Value Chain Management Program to help business strengthen supply chains.

While this may sound like management school jargon, it is important that Australian businesses manage their supply chains effectively. You want your suppliers and your customers to be your partners. If you can innovate and build effective delivery, marketing and quality assurance systems together, you will all profit.

This program will fund facilitators to go out into industry to assist companies to develop the skills to link with their customers and suppliers.

Pooled Development Funds

The Government will provide funding to continue the Pooled Development Funds Program and make reforms to improve its operation.

Pooled Development Funds are a scheme which allow tax-advantaged investment in venture capital. The Program will be reformed to make it more attractive to investors, including Australian superannuation funds and overseas pension funds.

These changes will i ncrease the supply of patient equity and venture capital to growing small enterprises. Changes to the Program will come into effect from the start of the 1999-2000 financial year.


The Government will provide an additional $82 million for the CSIRO over the next three years. This stems from our decision to continue in perpetuity earlier arrangements to lift the CSIRO's funding base.

Annual budget funding for the CSIRO is now almost $600 million, reflecting the Government's commitment to keep Australia at the leading edge of science and technology.

This strengthens the ability of CSIRO to work in cooperation with industry on R&D.

So in summary, my portfolio has a series of measures which deliver key election commitments to encourage investment and innovation in key sectors.

Non-portfolio Budget measures

Across other portfolios, there a number of measures which impact on business. They are equally consistent with the broad themes of our industry policy approach.

Feeding into innovation are the crucial ingredients of education and scientific research -- two themes Jeff Kennett picked up in your State Budget last week, when he put $310 million into an Investing in Innovation program.

We are encouraging innovation in a number of ways.

On the medical research front, we are doubling base research funding for the National Health and Medical Research Council over the next six years.

This will result in an additional $614 million in medical research -- money to fund the base research which industry can later apply in leading edge technology.

In education, we are increasing education funding, expanding Work for the Dole to the over-24-year-olds and training more apprentices.

This Budget also boosts investment across the economy, on the national infrastructure, where we are spending $195 million on extra road funding.

And we are, of course, already committed to assisting the Darwin-Alice Springs Railway to the tune of $100 million -- the last great link in national rail system.

Making Australia a global financial centre is another way to attract investment to Australia. The Budget allocates $3.5 million to this task, the details of which will be announced by the Prime Minister next week.

Taxation policy

You would all have a pretty good handle on the tax debate, so if I can address just three issues.

The tax debate has two broad elements:

The tax package in the Senate at the moment covers the abolition of nine taxes, $13 billion in tax cuts and a GST.

Then, still in development, we have the Ralph process.

The Tax package is bogged down in Senate. Labor is taking bloody-minded approach, refusing to respect the mandate we were given to implement.

Business tax is looming as far more sensible debate. Labor is embarrassed they dealt themselves out of debate on tax package. They're now trying to deal themselves back in on business tax.

We have had public comments from Beazley, Crean and McMullen, all indicating an open mind on Ralph's recommendations, with a bipartisan approach promised on Capital Gains Tax.

Capital Gains Tax

We had Deloittes last week report that a third of world's leading venture capital firms won't touch Australia because of our Capital Gains Tax regime.

This is costing us investment of between $600 million and $1.9 billion.

If we can't get funds into high-tech start-ups, we are going to miss out on the next-stage industries we need to prosper.

That's why we asked the Ralph committee last year to look at Capital Gains Tax and I'll be very interested in what they come down with.

And I look forward to working with the ALP to fix their Capital Gains Tax.

R&D tax concession

Another tax issue that has been in media is the 125 per cent R&D tax concession.

Can I strongly reiterate our 1998 election commitment -- we will be keeping the 125 per cent tax concession. We know it helps your firms to do R&D and that is good for the nation. So we will not be abolishing or reducing the concession.

Accelerated depreciation

The third issue is another of significance to you as manufacturers -- accelerated depreciation.

I am very conscious of the importance of accelerated depreciation to the manufacturing and resource sectors. It is going to be a difficult call finding the right balance between lower corporate tax rates and maintaining this concession.

I have been talking to a good cross-section of business on this. And I will be interested in what Ralph has to say. But I will be firmly wearing my Industry, Science and Resources hat when this issue hits the Cabinet table.

AIG Wishlist

If I can finish by ticking off what we have delivered compared to your AIG Budget Priorities. Your pre-Budget Economic Briefing sets out the seven elements you see as essential.

Going through them, I think I can say we have delivered on all seven.

First is continued delivery of good macro-economic policy -- something I have already gone over.

Second is comprehensive tax reform -- being delivered through the current package and Ralph.

Third is support for innovation:

We must reform Capital Gains Tax;

We are maintaining the 125 per cent R&D tax concession;

We have doubled support for medical research;

We have increased funding for the CSIRO;

We have put $400 million more into Cooperative Research Centres;

We have again increased support for industry R&D; and

We will be holding an Innovation Summit, to get input from all sides on how we can innovate even better.

Fourth is the national skills base. This Budget puts extra funding into education, putting more money:

  • into schools;
  • into literacy and numeracy;
  • into Asian language studies; and
  • into more funding for apprentices.

Fifth was infrastructure -- this is a government priority -- for example, this Budget includes $195 milli on extra for improved road infrastructure.

Sixth was the trade development and liberalisation issue -- not specifically a Budget one. Tim Fischer is doing great job working on three fronts -- improving market access, working hard on our bilateral relationships, and continuing to develop regional and multilateral ties, including pushing hard for a new millennium trade round.

And your last point was a pro-active investment strategy. This is something we have certainly provided, with Invest Australia and Bob Mansfield's role as Major Project Facilitator and Strategic Investment Coordinator.

In 1997-98, Invest Australia was instrumental in attracting and facilitating ninety-four investment projects worth about $2.8 billion.

The investments will generate an estimated 5,500 new jobs and annual new exports of about $1.4 billion.

Bob Mansfield has an impressive record working on investment attraction -- together we have persuaded Government to support Visy and Comalco.

I can proudly say that the Government and the AIG are very much on same track with same priorities.

I do look forward to working with you in what I think will be another successful year for the Australian economy and the Australian people.

Thank you.



jy  1999-08-23  14:31