Transcript No. 99/02

Hon Peter Costello MP

Doorstop Interview

Monday, 1 February 1999

11.00 am

E&EO

SUBJECTS: Employment

TREASURER:

I think when we look at employment in Australia the things that youve got to bear in mind are whats going to create jobs. Now, in Australia we have to work on four things, one is strong economic growth, and two we have to work on improved industrial relations, three we have to work on a better interaction between our tax and our welfare system and fourthly we have to make sure that we have a welfare system which encourages people to seek jobs. Now, in the last three years since the Government was elected, four hundred thousand new jobs have been created in Australia. And thats principally because we kept the Australian economy strong when Asia went into recession. And keeping the Australian economy strong was a matter of balancing the Budget, getting rid of Labors debt, keeping inflation low, keeping interest rates low and all of the good economic policy which weve go to continue to run. The Government put in place industrial relations reform, and we have to continue to work on that. But the third point that I would like to emphasise, particularly at the moment is that in Australia today we have a situation where people lose almost 100 per cent of what they earn as a result of the claw-back in social welfare benefits and high tax rates. We have a proposal in the Senate at the moment to reduce income taxes and to shade welfare benefits to help those people; Income tax cuts for low and middle income Australians, a very big part of taking disincentives out of the working situation. And the fourth thing we have to work on is welfare reform in this country. Now the degree to which you get those factors right is the degree to which you bring down unemployment.

And because weve made such progress in the last three years, we have had four hundred thousand new jobs, but if you want the progress to continue you have got to keep the reform going. And the most direct and important thing to be done in the immediate future is the passing of the Governments tax package.

Treasurer, what about monetary policy, the Reserve Bank has overachieved for two years on inflation, isnt there room there for a greater emphasis on employment growth?

Well, youve just got to look at the history of this dont you. Youve got official rates now which are, which have come down I think about 3 per cent since the Government was elected. You are at 4 – per cent, these are as low official rates as youve ever had. Improved competition in the financial sector means you have the lowest home mortgage rates in thirty years, and we now have the lowest small business overdraft rate in thirty years. So weve come an awful long way.

The point I made when the December CPI figures came out was that a low inflation rate gives us a cushion, it gives us a cushion against exchange rate affects, which are already in the system, and it gives us a cushion on which we can run those historically low interest rates.

Treasurer are you saying that an employment rate of around 4 to 5 per cent is not Santa Claus but achievable?

An employment rate of 4 to 5 per cent is the rate that youve seen in the United States. And its been done on a growing economy with a flexible labour market, and to the degree to which we keep our economy growing and the degree to which we improve our labour market, and the degree to which we get tax reform and the degree to which we pass welfare reform will be the degree to which we create more jobs.

Treasurer are you saying that we need inaudible

You see as I say before, I mean, weve got to achieve these things to make progress. And the faster we achieve them the faster the progress youll make. Now, lets take tax, if we could pass the Governments tax reform package immediately well get faster growth, well get better investment and well get better employment. If you want to sit around and argue about tax reform for years and make slow or no progress, thats the degree at which you will slow down economic growth and better employment outcomes. We can go over and over tax, for years, decades, we have been doing it already I think for twenty years, but all that means, is that we will have slower outcomes on economic growth and slower outcomes on employment. I mean, lets pass tax, lets move on past reform of indirect tax and income tax and the welfare benefits and we can move on then to business tax, and we can move on then to faster growth and more employment. But the degree to which you want to nitpick, delay, obfuscate, obstruct, all of the things that Labor is intent on doing, is the degree to which you hold up progress.

Treasurer, the Business Council seem to think you should have nominated 2 to 3 per cent unemployment as closer to what full employment would be.

Well I think most people would say the US economy is almost a full employment economy at 4 to 5, and if you look at the US market it has certain advantages that we dont have, and one of them of course is labour markets and youve got to keep moving in relation to labour markets.

But they dont have a GST in the US. They do not have one.

Most, I think, it is forty six or fifty states have services taxes, there are State taxes and sometimes city taxes. And in the United States of course, I think they would be better if they had one uniform rate, but theyve decided to go down a different path. I think we can do better in terms of indirect tax than the US has done.

Do you think we need to do more, or look more at the US approach to wages?

Well, look weve made great gains here in Australia, and I wouldnt underestimate those. But before you move on to the next thing lets just remember what’s in front of us now. Weve got a package now to reduce income tax rates for low and middle income Australians, and to taper welfare rates, in relation to family allowances and other benefits. What that means, is this will improve disincentives that currently exist in Australia. At the moment there are families in that twenty-three, twenty-four, twenty-five thousand dollar annual income level that can lose over 100 per cent of what they earn in tax and welfare. There is a proposal before the Senate now to change that. The degree to which we get on with the job is the degree to which we are going to make progress. Now, if you are going to sit around and argue about these things over and over and over again, and we all know what has to be done, we could waste another decade.

Treasurer youre saying that even after this current round of tax reform youll have effective marginal tax rates due to interaction of the welfare system of 90 per cent of more, and that therefore further tax reform will be necessary?

No, no, Im saying that this represents the great breakthrough and lets get on with it. Lets do this, you know, you can talk about what should be done in five years, I want to talk about what could be done in five days. You know, we could do this in five days, or five weeks or five months, but if it takes five years or fifteen years or twenty five years thats so much the slower.

….inaudibleunemployment taper.inaudible

The tax package reduces income tax rates, right across all levels of income including the lowest rate, which goes down from twenty to seventeen. It reduces income tax range, right through that range up to fifty thousand. It changed the taper rate in relation to family allowances with a much easier taper withdrawal rate, which again takes out those extremely high effective marginal tax rate. And it increases the income tests in relation to all of those family allowances. Now, if you have a family, a single income family, wife, two children, withdrawal of family allowances and the imposition of income taxes, in some of those ranges around the twenty three and twenty four thousand you can have 110 per cent effective marginal tax rate. And we have, hang on, we have for that family in relation to both their income tax rates and in relation to their family allowances reduced rates and tapered allowances. And they get very significant improvements.

But didnt your Treasury officials say there would be a negligible impact on employment?

No, the Treasury officials say, as I think most people who have looked at this, that improving the tax system and enacting the Governments tax package will create jobs. Thats what they have always said. It will create it from a number of respects, one is that we will have a more efficient tax system, two, we will be helping export, three, by reducing income tax rates people have more spending income, four, there will be greater incentives for employment, five, theres a fiscal effect arising from all of this. When you put all of that together, when you put all of that together, youll have more jobs. Now, you know, people say well, where should we go now? We should enact the tax package, because until youve got legislation through the Parliament you dont get any of those benefits. So thats the important thing.

Mr Costello in relation to 5 per cent Mr Costello, have you and the Government back-flipped on your thinking about what is achievable?

No, the Governments position has always been this, that it is the hard yards of economic reform thats going to improve economic growth and job outcomes. And you cant get a away from it, you cant get away from the hard yards. Unless youre prepared to do the hard yards on economic policy on the Budget, on inflation on industrial relations reform, on tax, on labour reform youre not going to make the progress. And anybody who says to you, oh we dont need to do anything but we can make progress, is not being honest. What we need to do, is, we need to bring to fruition, we need to bring into being, tax reform, just as we brought into being a balanced budget. We need to bring into being labour market reform, just as we have done in legislation. Thats they way you get good policy.

Thanks.