Transcript No. 2001/101

TRANSCRIPT

of

HON PETER COSTELLO MP

Treasurer

Questions and Answers

Sydney Institute

Wednesday, 25 July 2001

6.40pm

SUBJECTS: Globalisation, Tax

QUESTION:

Treasurer, you have acknowledged that tax is an issue in location of corporate headquarters and high value economic activities, and said it would be a mistake to shift the balance towards higher personal income tax. You didn’t address the question of how competitive the Australian tax, income tax system is now in a global market for human capital?

TREASURER:

Well, if we were to sit around a table of the developed countries of the world and the British and the French and the Germans and the Japanese and us, you would find that most of those countries are seeking to reduce their company taxes, their capital taxes and to some degree their income taxes. Now Europeans of course do this with large value added taxes. The Americans have retail taxes and most of our Asian competitors – Japan, Singapore are examples, are moving towards GSTs, rates of GSTs – have implemented and are moving further. So if you think that there is a global competition going on in tax and there is, and you think that Australia has to be competitive, what you will be doing was you would be re-weighting as I said from direct to indirect. The last thing you would be doing, because you would be alone in the world, would be going the other way. Now I think that there’s a continuum out there. This is the way I try to explain it. There’s the high tax, high spend starting off with the Scandinavians coming through the West Europeans moving on to the Anglo countries, the Brits, Canada and us – lower tax, lower social security, moving through the United States and ending up at the other pole of low tax, low social security which is probably Singapore and Hong Kong. There’s a continuum there. We’re further down this axis than the West Europeans, I think probably further down this axis than the British but not as far down this axis as the Americans. But I know which way the world is moving, it’s moving that way. And if you want to be competitive you’ve got to move that way. If you want to be competitive and have decent social security, you’ve got to have a taxation base. Now, I think the essence of your question probably was can we move further, that’s probably the essence of your question. And I’ll answer it by saying, we have moved and we’re moving and I’m glad we’ve moved to the degree that we have. The pressures will continue to come, will continue to come in the future.

QUESTION:

Treasurer you touched briefly on the market here in terms of it’s mass. What do you see in the future for our mass? Do we need (a) closer links with New Zealand so that we look like a bigger place far down south or do we pursue a much more proactive immigration policy?

TREASURER:

In the modern world it’s much easier to run an economy for a bigger population than a small one. And I gave you the figures, we’re 20 million, the EU is 375 and the North American Free Trade Area about 400. It’s about 20 times our size. So that as our companies grow there’s this natural gravity to these larger markets. Free trade with New Zealand, yes, that helps. That would increase the, has increased the size of our market from about 20 to 23 million. But we’re looking at 375 and 400 so we got an awful long way to go and it won’t be solved by immigration obviously because you’re not going to immigrate 380 million people into this country in, at any stage, and certainly not in the foreseeable future. So what does this mean for us? It means really we have to pursue more free trade agreements. There are small countries in Europe, about our size, and the Netherlands is an interesting case. The Netherlands is about the size of our economy, about the size of our population. What does the Netherlands have now, it has free trade agreement with France, Germany and the whole of Europe so it can move into that area. If you want to get big changes quickly it’s going to have to come through free trade agreements. We have to pursue those in my view aggressively. We’re pursuing them in relation to Singapore, the Prime Minister will raise it when he goes to Washington with President Bush. But that is the way I believe to get some economies of scale and to get some access to markets in the shorter run than in the centuries to come.

QUESTION:

Treasurer you were talking about commonality of tax systems and you place, you’re basically (inaudible) now as I understand it, there’s little commonality of tax systems throughout the EU (inaudible) Scandinavia (inaudible) Is there any movement to try and get, they’ve got a common currency about to come, they’ve got some comon free trade, is there any movement to get a common taxation system throughout the EU?

TREASURER:

Well there is in Europe. In fact one of the things that they’re moving towards is a common VAT rate, I think 15 per cent, so common VAT throughout the whole of Europe and the pressure is now on to harmonise taxation rates. This has become a big problem for the UK. And it’s one of the reasons why the UK is reticent about further entry into Europe because the United Kingdom has a competitive advantage over the countries of Western Europe, by and large it has lower taxation rates. It’s one of the reasons why the United Kingdom is a better base for business as many see it. As part of Europe there will be increasing pressure to bring harmonised taxation rates. It’s an obvious point. If you got a free trade, you’ve got a common Value Added Tax, you’ve got companies that can locate anywhere, they’re going to move across borders to get more sympathetic taxation rates. And this has actually been very interesting in international fora. The Europeans are always pushing for harmonisation of tax rates which is harmonisation at their level. The Americans and the Brits and us generally resist this because we have a competitive advantage. I mean we might be interested for example in pushing Hong Kong and Singapore to harmonise to our rates just as Europe might be interested in pushing us to harmonise at theirs. But yes, they are working towards that. They even have procedures whereby countries can get reported in the EU for taxation regimes which are too low and Brussels comes out and can investigate you for doing so. It’s not entirely clear how those things work out but if, they have been putting pressure on some of their member states on that basis.

QUESTION:

…engine room.

TREASURER:

Oh the engine room.

QUESTION:

What can be done to help this economy (inaudible)…

TREASURER:

Did you say what can be done to help it catch a cold?

QUESTION:

Help it stop (inaudible)…

TREASURER:

Help it not catch a cold? Yeah. Helping it catch cold is quite easy actually. It’s the reverse that’s harder.

The, world growth is slowing. And it’s slowing principally because the American economy is slowing. The June quarter, we’ll get a first take on the June quarter figures for the United States I think could be as early as this week, the end of this week. People are thinking the June quarter might be around zero. You heard the Chairman of the Federal Reserve warn the other day that he thought the rate of deterioration was slowing. That was the good news. We’re deteriorating but the rate was slowing, the rate of deterioration is slowing and that was the good news. Europe is slow. Japan is probably in recession, probably has been for 4 or 5 years and it’s very hard to think what more can be done in Japan. It, they’ve tried fiscal stimulation, their debt is about 130 per cent of GDP, they’ve tried monetary policy and nothing short of radical restructuring appears to help in Japan. So you’ve got the world’s largest economy slowing considerably and the world’s second largest economy probably hovering around zero or negative, and the third block Europe which is also slowing. All of that will affect Australia. As it turns out, our March quarter was very strong. We came off a downturn in the December quarter caused largely by transition effects. Our March quarter was very strong. And if you were to look up the OECD or consensus forecast, most people believe that Australia will be the strongest growing economy in the developed world in 2001-2002. They’re the consensus forecasts that are out there at the moment. There are some worrying signs in Asia again. Singapore has had two negative quarters and is in recession. Some of the other ASEANs are in recession. But we got our way through the Asian financial crisis in 1997-1998, I believe that the next challenge is now upon us. We will be helped by the fact that we have a strong Budget position, we have comparatively low interest rates and the exchange rate has meant that our exports are super competitive. So to take your analogy the world is sneezing but we’ve had a triple immunisation. You know, are we ready for this year’s variation of the world flu? Well I think so and we are determined to make every post a winner. But you can’t get complacent about that.

QUESTION:

Just a quick question. Globalisation brings everybody a little bit more directly comparable. What is your (inaudible) on execution of various interest rate policies, tax laws etc as being in (inaudible) maybe able to differentiate individual countries as globalisation integrated (inaudible).

TREASURER:

Well countries will start looking for comparative advantage. They’ll start looking for comparative advantage on tax rates. But you’ve got to remember where your country comes from and what it aspires to be. Our country as a developed country has a decent social security system and it aspires to keep it. It would make a nonsense to say we can move to the Hong Kong type model. Hong Kong is very low taxed but Hong Kong has a social security system which Australians would not accept. Nor do I believe they should accept. There’s still an expectation in this country, and I think it’s right, of a universal free education system and the provision of aged care beds and the aged pension. Now if someone wants to stand up and say well I’ll get rid of all those things, they probably could produce you a Hong Kong type tax rate. But that wouldn’t be Australia, it wouldn’t be Hong Kong. So we’ve got to keep an eye on the competitive advantage and seek it out. See our competitive advantage may lie in making some of these things our strengths you see. It may actually be a strength to say that in Australia one of the reasons why it’s good to have a head office is that, that families have a standard of life that they can’t get elsewhere or security on the street that they can’t get elsewhere or a skill base of educated people which they can’t get there. I think there’s going to be a great competition on institutions, who’s got the best institutions. I mean in business what do you need? You need certainty of laws, an insolvency regime, and one of our great strengths is a court system which is beyond corruption where once something is independently adjudicated people follow it. You’ve, I think in the modern world you’re just going to have to turn every one of these things to advantage and everybody else is going to be seeking out their competitive advantage. We have to do the same.

QUESTION:

Could you refresh our minds on what brought us successfully through the Asian economic crisis and whether there’s something different this (inaudible)?

TREASURER:

Asia was the great success story of the 70s and the 80s and the early 90s. All the talk in the world was the Asian Tigers. Why can’t we all be like the Asian Tigers? The Asian Tigers were having growth rates of 8, 9 and 10 per cent year on year. And it was always this question as to whether in fact they were just at a low standard of industrialisation and were catching up or whether this was some kind of new paradigm. What happened during that crisis because of exchange rate regimes that was a big part of it, because of a bit of contagion, because of the downturn of Japan, there were big flights of capital out of these countries. Foreign investment which had been driving this suddenly went out. In the country to our north, Indonesia, the exchange rate which I think had been about 3,000 went to about 17,000. And the baht went into freefall and in Korea they tried to hold the exchange rate and ran down reserves and there was this big sort of shock. And the IMF and the World Bank and us put together packages to try and re-float these economies and many of them kicked back off again once confidence returned in 1999. It was always an open question as to whether a great deal of restructuring had occurred. And Japan is the classic example. What has changed in Japan in the last 3 or 4 years? There’s been a lot of talk of restructure and what has changed. Now the world’s big engine room the United States which has been bouncing along now for a long time is slowing. And a lot of these countries, Singapore is a classic example, base their economies on re-exports into the world markets, semi-conductors, things like that. The United States economy turns down, the semi-conductor industry goes bad, Singapore has negative quarters. Now I don’t think there’s anything like the contagion of 1997-98 going on at the moment. What we’re having is we’re having a world slow-down and a lot of the countries that are exposed to exports are feeling it. The best thing that could happen for them, the best thing that could happen for us, would be the United States economy to kick up again. I’m confident that it will. I just can’t tell you when. It will. I can’t tell you whether it’s going to be this quarter or next quarter or the quarter after. It’s a powerhouse economy, it’s an open, strong, vibrant economy and I’m very confident that growth will resume. But it probably got a bit overheated and as expected it’s slowing down and that’s affecting all of these countries which are export exposed to it.

QUESTION:

Treasurer, you mentioned that one of our greatest assets is a well-educated workforce. (inaudible). I agree with you. I suggest that a well-educated workforce is really possibly our greatest (inaudible) that will produce the greatest economic (inaudible) in the future. If you look at Ireland, sure they had low tax rates, but one of the things to improve things is to invest tremendously in education. As a citizen I don’t get the feeling that the Liberal Party quite got that message, because I think (inaudible) and there’s plenty of anecdotal evidence of this. If you look at that (inaudible) and I’m very concerned as a parent that the next generation, our children’s generation, won’t get the same quality of teaching as I got as a kid, or as my children get today. If that’s the case I think that’s really something that’s going to be a long term (inaudible).

TREASURER:

I agree with you about the importance of education and you referred to anecdotal evidence. I think I could take you through our Budgets and I think I could show you that we are spending more on education than ever before, and that the increase has been quite substantial and for example I remember two Budgets ago we doubled funding for health and medical research in response to the Wills Report, in this most recent year with the Backing Australia Ability Statement we doubled funding in relation to Australian Research Grants. We’ve announced new formulas in relation to school education and I’d thoroughly dispute any proposition that in terms of funding things are running down, in fact quite the reverse. I think like you there are a lot of parents that wonder about standards. Now if you said to parents, I don’t know if this is right or not, but if you said to parents, and I happen to be one, do you think standards are increasing in schools, they might say like you, well I’m not sure that the standards are as good as they were in our day, but we’re trying to make funding conditional on literacy programs, numeracy programs. We now have national testing in relation to that as a condition of Commonwealth funding to the schools. And you’ve got to remember the Commonwealth sends money to the States and to the schools. It doesn’t actually run an education system. But what we try and do is we try and tie some of that funding to standards. And I think, I think investment in education is a good thing. Part of the point here I am trying to be making here is that if you want to invest in the social good, you’re going to have to have a tax base to sustain it. The GST revenue which goes to the States, every last dollar, now pays the salary of every schoolteacher in every classroom in every school in Australia. And if you want to wind back that revenue base you’d better think of another way of raising money to do that. I think taxation does feed back into expenditures. I think the public has a legitimate interest in knowing that it’s getting value for money for both. And I think just as an investment in education is important, so funding that investment is important, and so competing a competitive tax rate so that your kids can have good jobs at the end of it is important. And it’s holding all of those three things in balance. Is that easy? No it’s not. Unfortunately for us many of these problems are hard. If the problems were all easy there’d be no business of politics would there. But they are hard and they involve keeping things in tension which we’re trying to do.

QUESTION:

The anti-globalisation movement is not just on the streets, it’s now a part of the organised political process in most industrial countries including this one. So my question is what’s your strategy for dealing with the challenge in the mainstream politics in Australia?

TREASURER:

I think we have to explain benefits from what’s happening, part of which I’ve tried to do tonight. If you sit down and you talk to people and you say what are your objections. Well as I said look there are some people that committed leftists. They used to agitate for global Marxist revolution. It’s a bit hard to you know run an argument for communism now. So now they agitate against globalisation. I mean they’re committed hardened activists and I don’t think you’ll persuade them. There are other people of genuine concern that worry that this process is working against the poor in the developing world. And I said earlier, if that were the case we should all be genuinely worried. If this is making the poor poorer we should all be genuinely worried. I don’t think there’s any evidence of that. And when you see this paper in print I hope I’ll have convinced you of that proposition but we have to convince those genuine hearts out there as well. And then there are other people that worry about their situation in life and worry what’s causing it and just see it as a sort of an amorphous thing that’s out there somehow working against them and someone might give a name to this. They might give a name to it. They might say it’s globalisation, or it’s the New World Order, or you know the Protocols of the Elders of Zion or you know they might give a name to all of this. And you know I think to those people we have to try and put it out on the table and talk about it, and try and explain the case. I, you know, let’s take Genoa, riots in the street of Genoa because the 8 leaders, the G8 leaders are meeting. The G8 leaders have been meeting for as long as I can remember or they were G7, I’m not sure that anything’s changed. I’m not sure why the objections all came all of a sudden except to say that these protests are now feeding themselves and the media of course, coverage is encouraging them.

Let me finish off with an anecdote. We are a member of a group called the G20. G just means group by the way. Sounds sinister I know, as a group. G7, group of 7, G8, group of 8, G11, group of 11, we’re a member of G20, group of 20 and there’s a G77 which as you know, the developing countries, oh gee, they’re so many G’s it doesn’t matter. But we’re a member of a group called the G20 which was set up in the wake of the Asian financial crisis, the 20 economies of the world which were considered systemically important to the world financial system. And it meets generally once a year with the 20 Finance Ministers and the 20 central bankers. And so I attend along with the Governor of the Reserve Bank. Dr Greenspan attends with the Treasury Secretary. The Chancellor of the Exchequer attends with the Governor of the Bank of England. And the Chinese, India, the big non-developed countries. And we were sitting in Montreal and there was the usual demonstration going on outside because there was a meeting of the “G something” which means you should have a demonstration and it was during the Canadian election, the recent Canadian election and we were meeting in Montreal which happened to be the home city of the Canadian Finance Minister who was running for election while this meeting was going on and we were sitting there discussing globalisation and you know how do we explain the benefits to people and all these people were holding forth and I looked across at the Canadian Finance Minister at one point and I said, why don’t we take these 40 people out to your electorate and do some door knocking and explain to them why they should vote for you because of the benefits that you’re bringing them through globalisation. Well of course the 20 central bankers of the world were pretty uninterested. They don’t run for election. They don’t have to do door knocking and in fact as you looked around the table at the 20 Finance Ministers there weren’t that many Finance Ministers that run for election either incidentally. US Treasury Secretary doesn’t for example. The Canadian Finance Minister does, I do, the Chancellor of the Exchequer does. So let’s go out and do some door knocking I said and we’ll knock on these doors in Montreal and we’ll say we’re here from the G20 and we’d like to explain to you the benefits of globalisation. I said how many votes do you think you’ll get from this process. And of course there was just great hilarity. The Finance Minister of Canada came up to me afterwards and said that’s the problem, that is the problem, these guys are up there, how do we bring it down here? Because in a democratic society unless you bring it down there it doesn’t have much meaning. And I sometimes feel there’s a big disconnect. There are the people who understand the benefits and they’re the people that are deciding elections and nation’s destinies and it’s until you get the connect between the two, until you bring the G20 out of the hotel and you can explain it on the door knock, you’re always going to have this problem so I don’t know Peter, perhaps you should come door knocking with me next time.

Thanks very much.