ADDRESS TO THE

WORLD ECONOMIC FORUM DINNER

GRAND HYATT, MELBOURNE

THURSDAY, 23 SEPTEMBER 1999

I am delighted to have the opportunity to speak tonight, and to add my welcome to Claude Smadja.

Your visit is a very important one for Australia, and for Melbourne.

We are delighted that the 2000 East Asia Economic Summit will be held in Melbourne in 12 months time.

This past week has seen some major developments in Australia and in the region.

Understandably, the developments in East Timor have dominated our attention.

Our defence forces are leading a multi-national force in East Timor in order to restore peace and security.

This is our largest military operation since our involvement in Vietnam.

There is overwhelming community support for Australia’s political, diplomatic, humanitarian and military efforts to restore peace and security.

This week, the Government also announced its major reform of business tax. I will say a few words about business tax reform shortly. But I want to begin first with some observations about our region and Australia’s role in it.

It is highly appropriate that as we stand on the threshold of a new century, the first Asia Pacific Economic Summit held outside of Singapore and Hong Kong will be held in Melbourne, Australia.

I mentioned last week when I delivered the 16^th Asialink Lecture that the way Australia has responded to the events in East Timor has been a clear demonstration of its commitment to the region. This is where our geographic, strategic, political and economic interests lie.

It is for these reasons Australia has taken the role it has in responding to the tragedy the people of East Timor have suffered.

But we are also part of an increasingly integrated world. Australia’s future is inevitably connected to developments in Asia, but as with every economy in the Asia Pacific region, it is also irreversibly connected to the world at large.

We must not forget this point as we focus on the events within our region.

Nevertheless, I believe that the overwhelming community support for Australia’s leadership role in responding to East Timor is revealing in showing how Australians see themselves, their place in the world, and in particular, their responsibility in Asia.

A strong, robust Australian economy is of vital importance not only to the welfare of the Australian people, but also to the people in the region. Australian GDP is almost equal to the combined GDP of Malaysia, Thailand, Indonesia, Singapore and the Philippines. We are around the same size as Korea. Our economy is around a tenth the size of Japan.

The economic and trade linkages within the region are such that solid growth in Australia is good for the Asian economies, and in turn, Australia will benefit by the economies in the region returning to strong growth.

It is with this in mind that Australia has played a major role in responding to the economic and financial crisis which devastated many of the economies in the region over the past two years.

We have played a leading role in supporting regional financial packages. Along with Japan, we were the only other country that agreed to contribute to all three packages – pledging loan support of US$1 billion to each. This bilateral funding is drawn down after the first tier financing of the international financial institutions, if required and when required.

• US$800 million of the $1 billion has been disbursed by Australia to Thailand.
• We have not been requested to disburse any funds to Korea.
• We have not disbursed any of the funds to Indonesia.

We have also provided substantial technical assistance to the regional economies to improve their supervision of their financial systems and we have been extremely active in various forums working towards reforming the international financial system.

We have provided all this assistance because it is in Australia’s interests to have Asia return to strong, sustainable economic growth.

But we could only play this role, we could only respond to the needs of our regional neighbours and provide assistance because we had a strong economy.

We can only make the political, military and humanitarian effort to restore peace in East Timor because the Australian economy is strong.

And it is in a strong position because of the economic reforms which the Government has undertaken, and is undertaking.

There has been some comment on the budgetary cost of our involvement in East Timor.

It will cost hundreds of millions of additional dollars. It will require a re-prioritising of our spending.

But let us keep in perspective the cost and sacrifices of Australia’s peace keeping efforts in East Timor.

First and foremost is the personal sacrifice of Australia’s service men and women. They are in a dangerous and volatile situation, and our hopes and prayers are that they return safely and with their mission successfully completed. To date the operation has gone very smoothly and we can only be impressed by the professionalism and dedication of our defence forces.

Our main priority must be to ensure that the Australian forces in East Timor have the support they need to complete their mission.

It is also clear that we will need to increase our aid to East Timor as it stabilises and consolidates.

But it is extremely fortunate that we restored the health of the Australian economy and restored the health of the Government’s finances, so that we can now afford the cost of the regional commitments we are being required to make.

Imagine what would have been the situation if we had continued to run large public sector deficits and had been swamped by the Asian economic crisis? Imagine where we would be, swamped by the Asian crisis with this tragedy unfolding in East Timor. Australia would not have had the capacity to play the leadership role it is now being required to undertake.

Another point I would make about the policy reforms undertaken by the Coalition Government is that they clearly demonstrate the benefits, the dividend, that comes from sound policy settings.

Good policy brings results – the strong performance of the Australian economy is the result of good economic policy, just as the policy shortcomings within many of the economies in the region was the prime cause of the economic and financial crisis of 1997 and 1998.

And sound economic policy is the key to economic growth and in turn economic growth is a key ingredient to achieving greater political and social stability within the region. Economic prosperity supports social cohesion and peace.

If you ensure prosperity, you have employment opportunities, you can afford a social safety net and community services and thereby provide people with security – with hope.

But achieving greater economic prosperity will require understanding how to secure advantage in this increasingly integrated world economy.

I think this point is well made in John Ralph’s introduction to his Report on Business Tax.

” Increasing globalisation will translate into an increasingly competitive environment for Australian business. The impact of the telecommunications revolution and associated technologies, in diminishing the significance of national boundaries, will make more businesses feel the chill wind of much stiffer competition. We may remain an island geographically but we will not be able to hide from the forces generated by globilisation”

All countries must face the demands of increasing globalisation and one of the major responses we can make to adjust to this increasingly integrated world is to enhance international co-operation and understanding.

In particular I believe regional co-operation is essential for enhanced economic growth as well as greater regional stability – they go hand-in-hand.

Countries combine and co-operate if they have a common interest and it is perceived that their combined activities can lead to mutual benefits.

A major unifying factor between countries has been common security concerns.

The Atlantic community comprised sovereign countries which joined together in various economic, political and strategic associations to pursue some defined collective goods. What emerged was a system of loosely functioning international federalism around some specialist agreements and agencies – such as NATO, OECD, Group of Ten, and the Group of Seven/Eight.

The European Union has taken integration further than other groups, originally taking place within the framework of a customs union and subsequently extended to cover broader economic and political aspects.

A commonly felt threat to external security, combined with the recognition that mutual co-operation would enhance economic and political stability, is likely to have been the main prompts for the formation of the European Economic Community and subsequently the European Union.

Nevertheless, the relative homogeneity of the European Nations was no doubt important in facilitating the comprehensive framework of economic and political union that emerged.

But the Asia Pacific community did not exhibit the same unifying factors as evident in Europe or elsewhere.

Asia Pacific has been characterised more by its heterogeneity than its homogeneity. There is no common culture, heritage or security threat to bring the economies together.

But trade and economic co-operation has brought the Asia Pacific economies together. There has been a recognition of the countries in the region that despite their apparent diversity, economic success will depend on more structured regional co-operation.

This was the genesis of APEC.

And while APEC has come a long way in promoting greater economic, financial and trade co-operation, I believe the Auckland Leaders Summit marked a new phase in APEC’s development as it demonstrated the benefit of a regional framework in responding to a diplomatic/strategic issue.

But greater co-operation and understanding cannot rely on official groupings alone.

Summits, such as the one in Melbourne next year, provide excellent opportunities for people from around the world, and especially in the Asia-Pacific region, to better understand one another and move forward together.

And I believe we can move forward together.

I have often said that given the policy reforms in Australia – the reform of our fiscal policy, our monetary policy arrangements, taxation system, competition policy, financial and labour markets and the moves to reduce and potentially eliminate Commonwealth net public sector debt – the next decade can be a special one for Australia.

I am a realist, but I am also an optimist with respect to the outlook for Asia. And I believe the next decade can be a special one for Asia.

I am a realist in that I recognise the extent of structural reforms required for the region as a whole to return to strong, sustainable growth.

But I am encouraged by the progress that is being made.

• Korea has been recovering at a surprisingly fast pace;
• Malaysia appears to be rebounding;
• there is something of a turnaround in the Philippines;
• Thailand has strengthened ;and
• and at last we may be seeing a long awaited recovery in Japan.

The hardest hit crisis economy in Asia, Indonesia, seems to have turned around, although the events over the past few weeks, not only with respect to East Timor but also in terms of the pursuit of financial market reforms, have shaken confidence in the Indonesian economy.

As I said, I am a realist and I recognise that the shape and timing of the recovery of the economies in the region will depend on how vigorously necessary reforms are implemented.

But the process of reform and recovery will benefit from greater understanding and co-operation, something which will be enhanced by the World Economic Forum’s Asia Pacific Summits.

This is one of the reasons why I am an optimist when it comes to the outlook for Asia Pacific. We have seen evidence that many of the crisis economies are serious about reform and this will be further enhanced the more we share our perspectives and experiences on the process of reform.

As I said, policy does matter and good policy brings its rewards. As long as we see the pursuit of sound macroeconomic policies, ongoing improvements in corporate governance, appropriate assessments of credit risks and lending practices, and robust prudential and supervisory standards; and a competitive taxation system, we can be confident of an improved economic performance.

This brings me back to the key domestic economic development last week, namely the release of Australia’s new business tax system.

The first point I would make is that the decisions on business tax which I announced last Tuesday are part of a complete overhaul of Australia’s tax system.

It is a generational change in the Australian tax system, a change that will take Australia into the next century with a modern, efficient tax system.

The New Tax System involves:

• The largest personal income tax cuts in Australian history – $12 billion per year
• Large increases in government benefits, such as the age pension and family assistance and one-off bonuses for seniors;
• Reductions in the cost of diesel, petrol and other fuels;
• A fundamental reform of Commonwealth State financial relations, and
• The replacement of a range of inefficient indirect taxes, including the wholesale sales tax, with the goods and services tax.

These measures have already been legislated and their implementation will see a reduction in business costs by between $7-8 billion annually. Exports will be GST free and the lifting of the current tax impost on exports will see the costs to exporters reduced by over $3.5 billion annually.

The reforms to the business tax system which I announced must be seen as part of the total tax reform package.

And the benefits the Australian economy will gain from the tax changes that are already underway will be further enhanced by the introduction of an internationally competitive business tax system.

I believe there are a number of major problems with the current business tax system, these include;

• A company tax rate that is too high when compared with other jurisdictions, particularly in our region;
• A system where the burden of company tax was borne excessively by some industries compared with others which had the effect of distorting investment decisions;
• An excessively complex system which had resulted in the company tax legislation growing to exceed 4,000 pages, which imposed excessive compliance costs on taxpayers and failed to provide certainty;
• A system where different businesses entities were taxed differently; and
• A system which did not have a coherent framework for taxing investment income and discouraged investment in new high growth industries based on innovation and development of new markets.

As it currently stands, our business tax system was holding Australia back.

We gave the Ralph Inquiry the mandate to review the business tax system against a series of broad guidelines—to address the structural flaws in the current system, to consider the introduction of an entities tax system, to see what is required to encourage investment, to examine the scope to reduce capital gains tax, and to examine how we could achieve the goal of a 30 per cent company rate.

We appointed three leading businessmen to the review – John Ralph, Ric Allert and Bob Joss – and we asked them for maximum consultation with the business community in preparing their report.

This was a fundamental change in approach to considering business tax. We introduced an approach to considering changes to the business tax system which was led by business and involved maximum consultation with business.

The outcome is an excellent report – a report that has identified a landmark change to our tax arrangements. And as I announced last Tuesday, the Government has essentially endorsed this path breaking reform of our tax system.

I will not attempt to summarises all the measures covered in the over 800 pages of the Ralph Report, but let me mention a few key aspects of the Governments response to the Report

• We will move to a competitive company tax rate – 30 per cent. This will be among the lowest in the region
• In part this will be funded by moving to effective life depreciation
• There will be substantial incentives to invest and save with the introduction of an internationally competitive capital gains tax regime. For individuals, only 50 per cent of capital gains will be taxed, with the result that the highest rate of tax for individuals will effectively be 24.25 per cent.
• There will be a massive reduction in compliance for over 95 per cent of Australian businesses, that is over 800,000 individual enterprises and about 99 per cent of primary producers, by the introduction of a simplified tax system involving cash accounting, a simplified depreciation scheme, and a simplified treatment of trading stock – 75 per cent of businesses will not have to do an annual stock tax for tax purposes.
• There will be a major boost to venture capital with an exemption for gains made by non-resident tax-exempt pension funds on venture capital investments in Australia. In addition, there will be an exemption for gains made by Australian superannuation funds through a Pooled Development Fund.
• An entity taxation arrangement will be introduced which will apply a consistent taxation treatment across a range of business structures, and
• Tax avoidance will be reduced through the removal of complexities and anomalies and improved anti-avoidance measures will be introduced.

This is a partial summary of the vast array of measures addressed in the New Business Tax System.

But we set out with the objective of fundamentally improving the structure of the tax system and this has been clearly recognised by business. The reaction to my announcement last Tuesday has been very positive. Some of the headlines from business include:

• ” Minerals Council Welcomes Initial Response to Ralph Review”
• “Business Tax Measures Should Help the New Economy”—Australian Electoral and Manufactures’ Association
• “The Australian Industry Group welcomes the Government’s response to the Review of Business Taxation”
• “Small Business and small investors the winners from Ralph” – Australian Society of Certified Practicing Accountants
• “Good News For Saving and Investment” – Investment and Financial Services Association
• “The Institute of Chartered Accountants in Australia welcomes the release of the Ralph Report and the Government’s Response”
• “Business Tax proposals pleasantly surprising” – Taxation Institute of Australia
• “Australian Institute of Company Directors welcomes business tax reforms”
• “Ralph outcome largely balanced and positive” – Association of Superannuation Funds of Australia Ltd
• “Financial Planning Association of Australia applauds Government’s support for investors through Tax Reform”
• “Ralph creates the climate for stronger venture capital investment in R& D” – AV-CC

I could go on.

But I think I have made my point about the very positive reaction to the announcement of the New Business Tax System by the Government.

Although this should not come as a surprise, because this was a reform that involved extensive analysis and consultation with business – it involved perhaps the most intensive consultation on business tax issues ever undertaken. And we listened to business, we have been responsive and we have seen the results – a very good and positive policy package.

But the other thing that this illustrates is that there is no need for further inquiries by the Senate when the legislation is presented. We have had the inquiry and business wants to get on and see the reforms implemented.

Let me conclude by saying a few words about the basic approach I have taken to the reform of business tax.

The purpose of taxation is to raise revenue to fund government expenditure on goods and services for the community. We should not forget this fact. The basic attributes of taxes is that they should be fair, efficient, should not distort activity, should impose minimum burden on taxpayers and should have a degree of certainty.

My basic approach is that the broader the base, the lower the rate, and the broader the base the less the distortion, the complexity and the unfairness.

And the lower the rate, the more competitive Australia will be in attracting investment.

And the less the complexity and distortions, not only is there less scope for abuse and the greater compliance, but also the dead weight of the cost of compliance is reduced.

This is the basic approach to the redesign of the business tax system contained in the Ralph Report and the basic approach underlying the Government’s response to the Report. For example,

• By removing accelerated depreciation, there is no need for the existing complex provisions directed at controlling the leasing treatment of tax-exempts;
• Removing indexation and reducing the rate of capital gains greatly simplifies the operation of the capital gains tax system;
• Allowing small businesses to adopt cash accounting and a simplified depreciation scheme dramatically reduces the paperwork requirements of small businesses;
• The cashflow/tax value – or high level reform – proposed by Ralph, would result in a tax law that is much simpler, have greater integrity and certainty as well as addressing many of the tax schemes which exist in the current law.

I have been amazed by the suggestion by the Opposition that we have been light on addressing tax avoidance. On Tuesday I announced a series of measures that have effect from 22 February and are directly addressed at improving the integrity of the tax system. These include;

• Loss duplication based on defects in the continuity of ownership test for deducting company losses;
• Duplication of unrealised losses;
• Artificial losses from the transfer of assets within a majority owned group; and
• Loss duplication based on excess mining deductions.

But we have also embarked on a complete overhaul of the business tax system with the direct objective of improving the structural integrity of the system, to reduce complexity and uncertainty and to provide a basis for ongoing simplification.

The Ralph Report recommended a streamlined anti-avoidance rule, and the Government is giving consideration to these recommendations. But central to the recommendation is the proposition that structural reform should be the primary mechanism for responding to tax avoidance. The New Business Tax System I announced on Tuesday is all about structural reform of our tax system.

We should not, of course, lose sight of the overall objective of tax reform. I think it is summed up well in the opening lines of the Ralph Report

“Australia needs a sound tax system to contribute to the improvement in the future living standards of all Australians. It must be capable of dealing with a changing world environment, changing technology and changing lifestyles. It must also provide enough revenue to ensure that essential government services are available for all Australians”.

The Coalition Government has fundamentally overhauled the tax system and has given Australia a tax system for the next century.

We will enter the next century with a tax system that is modern, competitive, and fair.

We will have an internationally competitive tax system which, when combined with all the other reform initiatives undertaken by this Government, will create the environment for achieving higher economic growth and more jobs.

It is because of these reforms that I believe the next century will be a special one for Australia.

With good policy, I believe the next decade can be a special one for the Asia Pacific region.

Our mutual prospects will be enhanced with greater understanding and co-operation.

And it is for this reason that we are greatly looking forward to hosting the Asia Pacific Economic Forum in Melbourne next year, and I look forward to seeing Mr Smadja back in Melbourne in 12 months time.