Labor’s tax policy costing black hole, Charter of Budget Honesty – Press Conference, Parliament House, Canberra

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September 21, 2004
Housing market, economic management, Labor’s tax policy costing black hole – Doorstop Interview, Queanbeyan
September 23, 2004

Labor’s tax policy costing black hole, Charter of Budget Honesty – Press Conference, Parliament House, Canberra




Press Conference

Parliament House, Canberra

Wednesday, 22 September 2004

3.00 pm


SUBJECTS: Labor’s tax policy costing black hole, Charter of Budget



Fifteen days ago Mr Latham released a tax policy and for the last fifteen

days the Government has been calling on him to have it independently costed.

The Federal election is now 17 days away and he has steadfastly refused

to have his policy costed and hidden it from independent costing under the

Charter of Budget Honesty because the policy doesn’t add up. The policy

contains costing errors and the policy contains behavioural or second round

effects which are not generally allowed by The Treasury.

The most serious costing error is Labor’s treatment of the Low Income Tax

Offset. The Low Income Tax Offset is an offset of $235 per annum available

to low income earners. Labor wants to abolish it and introduce something

called the Working Tax Credit. The Working Tax Credit is $416, Working Tax

Bonus I should say. The Working Tax Bonus is $416 per annum.

In Labor’s costings on page one of their Tax and Better Family Plan, Labor

nets the cost off the Low Income Tax Offset. It nets that cost off in 2005-2006.

But the Low Income Tax Offset which is paid in 2005-2006 is an offset in

respect of the current financial year. It is paid in arrears. It is paid

by way of a tax refund. So if people are entitled to receive the Low Income

Tax Offset in respect of the current financial year, under Labor’s policy

there is a $700 million hole in its costing. Labor can go the other way

of course and say, there is no hole in the costing we just intended to abolish

the entitlement in respect of the current year. If that is the case, that

means that 3.5 million Australians who are entitled to, and are expecting

to receive a Low Income Tax Offset in respect of the 2004-05 years will

retrospectively have that taken away.

But they can’t claim a saving for abolishing it in respect of 2005-06 unless

they are going to take away a current entitlement in the 2004-05 year which

would leave 3.5 million Australians worse off. Since their policy says that

they did not intend to abolish it from 1 July 2004, one can only conclude

that Labor intends to abolish this Low Income Tax Offset from 1 July 2005.

They have made an error in their costings of $700 million. They have netted

off the cost of an entitlement which will have to be paid if they are elected,

and implement their policy.

In addition to that there are other errors in Labor’s policy. There is

the error of the reversal of the Government’s measure to allow small business

with annual turnovers of $50,000 or less to do so on an annual basis. Labor

claims a cash saving from that in 2005-06. If Labor is successful and introduces

that, that cash saving will be in 2004-05 and will not be available to fund

its policy in 2005-06.

In addition to those errors there are other supposed savings that Labor

claims to fund its policy. One is an overestimated revenue from ATO compliance

activity which is outside the benchmarks that the Treasury has allowed in

recent Budgets. The second is the so called participation dividend based

on the so called Melbourne Institute Report which Labor claims will deliver

$1.2 billion.

Now this analysis which I have released today, extensively reviews that

so called participation dividend. So called participation dividends are

not allowed by Treasury in respect of tax changes. They were not allowed

in respect of the Budget. They were not allowed in respect of Family Tax

Payments. In addition to that the analysis has been seriously selective.

The Melbourne Institute has apparently modelled the participation benefit

on changes on one side of the equation but left out corresponding tax rises

from its analysis, based it on outdated data, left out the fact that in

some upper, middle and upper income areas Effective Marginal Tax Rates increase

under the Labor Party policy.

Now this policy should be submitted to Finance and Treasury. Finance and

Treasury will be entitled to determine whether there is a so called dividend.

It could have been submitted 15 days ago. The election is in 17 days. Mr

Latham should have his policy independently costed. This policy has serious

costing errors. This policy has non existent participation dividends. This

policy is underfunded or alternatively this policy could make 3.5 million

additional Australians worse off because it takes away from them the Low

Income Tax Offset in respect of the 2004-05 financial year.

The people of Australia are entitled to know from the independent agencies

what the effect of these policies are. The provision exists and Mr Latham

should take it up immediately.


Who has done this costing for you Treasurer?


We have done it ourselves. That’s our costing.


Within your office?


With assistance from other offices, yes.


With any outside help or consultancy firms?




Mr Costello, the $2.7 billion underfunding is that on an underlying cash

basis or…?


Yes, this is all on a cash basis.


(inaudible) make any difference if it’s on an underlying fiscal balance?


Well I haven’t done it on a fiscal balance because Labor’s costings are

on a cash basis. So I have done a cash analysis.


So you had no help from any Commonwealth Government Departments in undertaking



No because the Commonwealth Government Departments will independently cost

this policy when it’s put in.




Why, you know, let me ask rhetorically, why can’t it be put in for costing?

This was released 15 days ago. We have lost 15 days. This election is in

17 days time. Why hasn’t this been put in for costing? I have been waiting

every one of those 15 days for Labor to have the independent scrutiny.


Mr Costello you used behavioural dividends in both the GST, introducing

ANTS and the Ralph Reforms on Capital Gains. Why can’t Labor use them for

its tax policy?


We did not have employment dividends.


There were growth dividends…


There were growth dividends…


(inaudible) modelling?


…in relation to the economy under A New Tax System. We have not used

employment dividends. We did not use it in relation to income tax changes

or Family Payment changes in 2003-04 or 2004-05. We have not used employment


Why? Because The Treasury wouldn’t allow it. Now you don’t have to take

my word for it. It can be put into The Treasury and we will see if The Treasury

will allow it in respect of Mr Latham’s policy. Now this is the point here,

there is an independent arbiter that can look at this.

The other thing I would like to show you, the other thing I would like

to show you is of course, even on its own terms this so called participation

dividend is exceptionally shaky. One, because it only models one side of

the equation as we say in our document here. It doesn’t take into account

the other tax increases like the tariff increases, the increases in the

superannuation surcharge. It relies on, as we say in this document, and

I would ask you to read it in its entirety, it relies on outdated employment

figures going back to 2001. It relies on Labour Market data of 2001 for

an employment dividend in 2005-06 and 2007-08.

And of course it is notoriously selective, because the Melbourne Institute

wasn’t allowed to look at other changes in Labor policy that will undoubtedly

affect participation. The greatest being workplace relations. Labor said,

look at this narrow area, exclude the totality of this policy and exclude

any other policy and try and work out for us how that will lead to a participation



Treasurer has Treasury told you that they will reject Labor’s tax policy

with this participation dividend?


No. Treasury will make its own decision.


But you said it then they will not allow behavioural…


Well, they have never allowed it to date. They have never allowed it for

the Government.


Isn’t growth a behavioural model?


Look, we introduced in our recent Budget $14 billion worth of tax cuts.

And you know what we claimed for participation dividend? Nothing. Because

Treasury in its, it says it, it says it in here in the Charter of Budget

Honesty. It doesn’t allow costing in relation to policies as second round

effects. Because they are notoriously unreliable and you can only come to

the conclusion if you know all of the policies that are going to be implemented.

 You know, how could you possibly say if you are Labor,

we introduced this Family Tax Policy, that will put 70,000 people in work

and that will pay for this policy, but don’t look at our Industrial Relations

Policy because if we implement that, that might put 150,000 people out of

work? That is what they cordoned off. And of course if that puts 150,000

people out of work there is going to be no participation dividend.

Now, you know, here we are, we have a situation in this Election where

these issues can be resolved in accordance with standard practice and they

can be resolved under the Charter of Budget Honesty. It could have been

resolved 15 days ago. All I am saying to you is that Labor is letting the

days click down, hoping that they can stick this in too late for the Treasury

to analyse it, and too late for the public to have the facts. This is what

happened in 1998, this is what happened in 2001, where the policies were

going in on the Thursday night before the election so they couldn’t come

back in time. Now, 15 days have elapsed and there is no reason whatsoever

why this policy could not have been submitted in the last 15 days.


Treasurer, if Treasury is allowed to cost Labor’s tax package and it finds

a hole that is less than $2.7 million, does that undermine your credibility?


Look, Labor has got questions to answer about its tax policy. Our tax policy

is fully costed. Our policy is out there. Our policies are in with the Charter

of Budget Honesty. You know, the question here is, why aren’t the Labor

Party policies.


But do you hang your reputation, do you hang your reputation as an economic

modeller on these documents you have provided us with today?


No, I hang my reputation on the independent costings of Treasury and Finance

and I say, let’s get an independent assessment. Now I have been saying that

Labor has to answer these questions for the last 15 days – Labor hasn’t

answered them. There is one way they can be answered.


Do you stand by the accuracy of the figures that you have presented in

this document here?


These figures are accurate…




…and they turn on assumptions and policies, but you know, what I

am saying to you is that we don’t have to have an argument about this, this

can all be resolved – it could have been resolved 15 days ago. Let

me ask you the question again, what is Mr Latham’s reason for not submitting

this policy 15 days ago?


Mr Costello, this is, the $700 million that seems to be the strongest of

the costings, these costing errors that you have talked about, that is a

bit less than half what the Government’s promised to spend on new Medicare

measures during the election campaign which it isn’t funding. Why is it

OK for the Government to keep making un-funded election promises while bashing

Labor about its head about its economic credentials?


Well it is funded.




It was in the PEFO.


That doesn’t mean it is funded…


Yes it does, it means that it is in the bottom line.


…it doesn’t mean you have got offsetting savings.


No, it means that it is fully funded and it is in the Budget bottom line.


Mr Crean probably says quite rightly that you are spending like drunken

sailors, I mean they are at least offsetting some of their savings, offsetting

some of their spending with savings…


Well I don’t think they are.


…well, but you are not even attempting to do it, you are attacking

them for not…


No I am attacking them because their policy indicates that they are not

going to pay the low income tax offset in 2005-06 which people are entitled

to in respect of the current year. That is what it indicates. Now, they

have not told anybody that that is what they plan.


So, it would be OK for them to say, oh no, that is what we are going to

do and we will just reduce the surplus by that much.


So, it would be OK for them to say, yes we are taking away the low income

tax offset from people who are entitled to it in 2004-05 and that every

person that is entitled to it as a consequence is going to be $235 worse

off as a consequence. But you see what the Labor Party is trying to do is

it is trying to tell you that everybody is going to be better off whilst

hiding what they are taking away from them. This is the point, this is why

you analyse policies. You know, they are, as we speak, in the marginal seats,

the Labor Party is mailing out how everybody is a weekly winner on the basis

of rigged tables. As we speak people are receiving letters in their letterboxes

from the Labor Party, telling them how every week they are going to be better

off. The trouble is, the figures are rigged.


Treasurer, I am a bit confused, you say these figures are accurate, but

you haven’t used Treasury, but you are saying that Labor’s are inaccurate

for the same reason.


Well Labor’s figures are inaccurate and if Labor wants to have its figures

verified there is a very easy way of doing it, submit its policy. I mean

my policies are submitted to the Treasury, they are accurate. The Treasury

determines whether or not they are accurate. Now Labor can do what we do.

It can put them into the Treasury and I am saying that until such time as

they put them into the Treasury and until such time as they have them analysed,

nobody can believe the Labor policy. And I am asking you this question:

why is it after 15 days that they won’t do this? And I am saying that this

is a dodgy document which relies on participation dividends, which relies

on so-called tax dividends, which doesn’t adequately account for the low

income tax offset, which doesn’t adequately account for the GST decision

that we made in the last election – it is a dodgy document. The whole

thing is dodgy. The tables are dodgy, the costings are dodgy, the participation

dividends are dodgy and whilst we speak, the Labor Party is out direct mailing

people claiming it has all of these benefits.


Treasurer you have been very critical of Labor’s welfare to work incentive

saying that in effect it is just punishing poorer families, single income

families, what will the Howard-Costello Government do in its fourth term

if they are re-elected to create more incentives to get more people into

the workforce and out of welfare?


It is not just low income families, it is middle income and upper income,

single income families that are worse-off too. You know, I keep harping

on about the low income ones because you know, it beggars belief that you

would want to take money off a family on $35,000 with three kids, but it

is not just $35,000, they take it off families where their total family

income is at $80,000 too. It’s not just low income earners. The reason why

Labor’s policy takes money off single income families is that under the

Government’s policy where you have a single income, that is, where Mum is

at home looking after the kids usually, you get Family Tax Benefit B – that

is being abolished. And the reason you get further and further penalised

by the Labor Party as the number of your children increases, they take away

$600 per annum per child. But it is not just the low income earners, this

is the point that I want to make, it is upper and middle income earners

as well.


But what are you going to do about welfare to work…


Well I am going to hopefully defeat Labor’s policy, which will make sure

that all of those people are going to be hundreds of dollars a year better



So you are not going to give them active incentives to get into the workforce?


Well we announced in the Budget a whole lot of measures that gave them

active incentives. We announced the moratorium in relation to families receiving

FTB B that are returning to work. We changed the taper rates. We introduced

intensive assistance in relation to sole parents. We have a whole range

of measures. The one measure that we are not going to do is actually go

down and say to parents give us back $500. Let me ask you this question:

single income family, Mum is at home looking after three kids, Dad is earning

$35,000, we are feeding three kids, Labor’s policy is to take money away

from them. It is not because they are not working, because Dad is out in

the workforce, it is because they are low income earners. It is not a very

fair policy and to try and dress up huge numbers of losers like that and

say, oh well, actually you know, this is a good thing because it will force

Mums out of home and into the workforce, it’s putting a bit of a gloss on

it. A very big part of it, let me say, you know, making a virtue out of

an absolute catastrophe I would have thought. You know, their policy makes

those people worse-off and they say, oh that is actually good because if

we make them worse off we will scare Mum out of the home and into the workforce.

Thank you all very much. Thanks.