Transcript No. 99/60

Following a very strong period of sustained economic growth, the National Accounts for

the June quarter in Australia today showed a moderation in growth to 0.2 per cent for the

quarter. And the figures were revised up in relation to the March quarter from about 1.1

to 1.4. So as I have said repeatedly one has to take care about the individual quarterly

numbers but there’s certainly evidence of a moderation in growth occurring as a result of

these figures. Notwithstanding that, growth through the year averaged 4.5 per cent which

exceeded the forecast we made in May in the Budget of 4 per cent, largely as a result

of strong revisions upwards in the March quarter. And through the year growth was about

4.1 per cent which means that over the last two years, in the face of the Asian financial

crisis we have had nine consecutive quarters of growth exceeding 4 per cent in

through-the-year terms, which was the longest sustained period of GDP growth above 4 per

cent since the early 1970s.

Today’s National Accounts also confirm that inflation is low, notwithstanding

strong growth, notwithstanding exchange rate affects that we’ve seen in the course of

the last year, subdued price pressures with the household consumption deflator rising by

0.1 per cent in the quarter and 1.1 per cent through the year.

In relation to the June quarter, what the National Accounts show was that domestic

demand was flat in the June quarter following a very large increase in March of 2.1 per

cent. But the Government believes that domestic demand will continue with solid levels

throughout 1999/2000 supported by employment growth, high productivity, healthy corporate

profitability, historically low interest rates and low inflation. The picture that we see

out of these National Accounts is the picture that the Government has been putting forward

in its forecasts for 1999/2000. That is a slowing of growth from the exceptionally strong

levels of 4.5 per cent through 1999/2000, growth coming back more to the levels of 3 per

cent before growth picks up again in 2000/2001, particularly with the new tax system and

the changes that are going to come into place in July of 2000.

So we see a moderation of growth as we come off exceptionally high levels, with the

world economy picking up later in 2000/2001 and providing an external impetus and

Australian growth continuing to grow strongly.

It’s important, however, that we maintain the impetus in relation to economic

policy. The point that I’ve made repeatedly is that at a time where you have pressure

on your current account it is important that the Government runs a surplus fiscal

position, it is important that the Government carries forward it’s structural changes

in relation to tax and it’s important that we make sure that we have a

non-distortionary economic investment climate. We see strong opportunities for Australia

in relation to that in the forthcoming year and the Government will continue to work at

that.

Mr Costello is the Government actually happy that the June quarter figure is just 0.2

per cent, doesn’t that take the heat out of the economy and reduce the chance of an

interest rate rise down the track?

Well, we’ve always said you’re not going to maintain growth at 4.5 to 5 per

cent indefinitely through a monumental regional world financial and economic crisis. And

we have been predicting a slow down, which is consistent with these numbers. Now,

it’s not unexpected, and there will be some bright sides to that, but having said all

of that, as a general rule strong growth, strong sustainable growth is always better than

weaker growth.

Would it be enough to offset the fiscal stimulus you are going to give next year of

something like $7 billion net of tax cuts?

Well, I think this is thoroughly consistent with the new tax system and the fiscal

stimulus that it involves. We forecast a slowing economy through 1999/2000 and there is a

fiscal stimulus in July. You’ve now seen the moderation starting to come through, so

I think it’s very consistent with that. I think the view amongst many people over the

last couple of months is, you know, where is the evidence of the moderation. Well here is

some evidence of moderation. Now, when we talk about moderation in growth, for many

countries 3 per cent is not a moderation in growth, 3 per cent would be considered beyond

their expectations and wildest dreams. People talk about the powering on of the US economy

because it’s growing at about 3 per cent. It’s a luxury we have in Australia, I

guess, to be able to talk about 3 per cent as a moderation of growth, but we see that as

thoroughly consistent with the picture that we’ve been painting.

So has the Reserve Bank Governor been alarmist or realistic, in his reported remarks on

the front page of the Financial Review?

Well, I spoke to the Governor of the Reserve Bank this morning from San Francisco, and

he was not giving a speech in Jackson Hole. He chaired a meeting. He did not speak to

journalists and he did not make any comments to the effect reported in the Financial

Review, and that’s what he told me this morning. And since he made no speech, it is

pretty hard to figure out where he is supposed to have made those comments. But he told me

that the story is false. He did not make those comments, he did not make a speech and he

did not speak to journalists.

Treasurer are you satisfied with the national saving implications that appeared in the

National Accounts today? Are you satisfied they’re strong enough?

Well, there’s a bit of turn up in the savings ratio, which you saw in the National

Accounts today, and that’s consistent actually with flat demand. But I’ve never

made too much out of the savings ratio. I’ve always said that you’ve got to be

careful of the figure in fact, and I always point you to the fact that the National

Accounts themselves say that caution should be exercised in interpreting the ratio. But I

suppose the fact that it has gone up is welcome, I’m not sure that you can put too

much store on it. But you can’t have it both ways, you know. You can’t have

massive consumption and increased savings, and the fact that we have had some flattening

out in consumption and has led to increased savings I suppose is a welcome note in this

particular quarter’s National Accounts.

Mr Costello what will be the inflation impact of the revised GST deal with the

Democrats?

Well, the inflationary impact will be around about that which the Government forecast

during the course of the election campaign. There will be some adjustments because, as you

know, food will not be subject to GST, but on the other hand reductions in indirect taxes

will be delayed, or abolition of indirect taxes will be delayed. But I will probably have

some more to say about that a little bit later after we’ve analysed it very closely.

It’s been 3 months now since you’ve actually done that deal, I mean, you must

have the figures by now.

Well, I’ll be, as I said I intend to say a little bit more about that after

I’ve done some more analysis.

Mr Costello what is your timetable now on the release of the Ralph decisions? And how

soon after the first lot of decisions do you think that you can make the decisions on the

rest of Report, are you talking a two-stage process?

Well, there are some matters in the Ralph Report which are market sensitive, and some

matters that need to take effect from it’s release. And so it’s important that

the Cabinet feels comfortable with those issues so that we can make the announcement, date

the measures from the announcement and release the Report. I expect that will be probably

this month, at this stage. There are some other matters which are not as sensitive and the

Government doesn’t have to make an immediate announcement and so it has a bit more,

the luxury of a bit more time in relation to that. But the point I keep making is that

this is a complicated area. Business taxation is, is exceptionally complex and some of

these issues involve matters that aren’t the stuff of political debate, but the stuff

of highly tuned international tax lawyers and the Cabinet has to get its mind around it

and that’s only fair. Look Mr Ralph took 12 months, so I think the Cabinet’s

entitled to have weeks.

Treasurer, you’d expect in that first tranche of decisions, you’d expect the

Capital Gains decisions there?

Well, I would expect the Government to make some announcement on its attitude in

relation to Capital Gains because we referred, don’t forget this, we referred Capital

Gains to Mr Ralph. We asked Mr Ralph to report on Capital Gains. We actually referred

specific ideas to Mr Ralph, we asked him for an economic analysis of those ideas and we

said if you have some others or better ones, give us the benefit of your wisdom on that

too. So when we set this up, we set this up as a vehicle to consider Capital Gains Tax and

I expect that in the context of Ralph we will, we will be announcing a position.

In the first lot of decisions?

Well, I expect we will be announcing a position. I mean I’m not, I’m not

going to tie myself down in advance.

Are you still keen on the $1,000 . . .

Well, that was one of the three things we referred to Ralph. We referred to Ralph

$1,000 exemption for book keeping reasons; we referred the idea of a stepped rate to

Ralph; we referred scrip for scrip and we said make sure you have a look at those and

think of a few more.

. . . still keen on $1,000.

Well I put that forward as an idea for investigation and I’d be very interested

that it has been investigated. But I’m not tying myself down.

Is it stating the obvious to say that if the tax cuts overheat the Australian economy

then monetary policy would be needed to restrain it?

Well, no doubt you’ll take your own assessment in relation to that Mr Bongiorno,

but no doubt you could do that as a piece to camera yourself, rather than have me do it as

a piece to your camera.

It would be more credible I would think.

Well, you know, it’s a funny old world isn’t it? Here we have a set of

national accounts which are showing a moderation in growth and you’re asking me about

overheating in the economy.

Twelve months later.

Now let’s, let’s put all of this in context. The national accounts which

showed 0.2 per cent for the quarter in June also revised up to 1.4 for March. Now what

that tells you is that there’s some averaging that’s got to be done and probably

the best averaging that you can look at is the trend figures. And you got trend GDP growth

coming out as I recall at about 0.9. 0.9, 0.8, round about the 3 per cent mark for

1999-2000 and that’s why I say this is the consistent view with 3 per cent growth,

growth moderating throughout the course of 1999-2000.

Would you expect to be able to continue to boast the historic low interest rates well

into 2000?

Well, interest rates, not only are interest rates historically low but Australian

official interest rates now 50 basis points below the US. And the third thing that

I’d ask you to note about monetary policy is it’s been exceptionally stable. Go

back through the Asian financial crisis, find another country in Asia, a market economy in

Asia, that didn’t move interest rates in the last two years. Or compare Australia to

the US which cut interest rates and now is rising them. Or compare it to Canada which

pushed interest rates up in 1998 to defend the Canadian dollar. And the fact that the

Australian interest rates were stable right throughout 1998-99 is a testament to a very

strong monetary and economic position. And almost without peer in the world. And that of

course is precisely what the Australian economy needed through 97-98, huge external

downturn, low interest rate environment in Australia, strong domestic demand, counter

cyclical against the world, Australia sails through the biggest financial downturn of our,

of our age. Growing and growing faster than the world. I mean in many respects we’ve

been living, because we’ve been living inside all of this, we don’t see what,

what an exceptional performance that it was, that most of the world sees. And now you see

growth coming off a bit but again let’s put it in context, growth coming off to 3 per

cent, in France or Germany or the UK they’d be talking about growth massively

accelerating to 3 percent.

Mr Costello, isn’t Cabinet’s lengthy consideration of Ralph sidetracking you

in making a contribution to the Republic debate and couldn’t this be some sort of a

conspiracy regarding the monarchists (inaudible).

Well, you know that monarchists don’t conspire. They haven’t conspired since

the Guy Fawkes rebellion so I think that’s a bit unfair. Look it’s exceptionally

hard work, indirect tax is tough and hard and income tax is tough and hard, but I keep

making the point in relation to Business Tax you’re looking at things like balancing

charge offsets and imputation credits on dividend withholding taxes and consequences under

double taxation agreements. You know people don’t go into pubs and say tell me your

policy on the imputation credit of a dividend withholding tax. But for those that actually

engage in it, there’s nothing more important to them in life. And so it’s a

question of the Ministers getting their minds around it and not only around where we want

to go, but around where we are and the implications of getting there. It’s, it’s

a complicated business this and it’s taking a lot of time, I can assure you of that.

If Ministers have trouble getting their minds around it Treasurer, once small business

people have it, isn’t there in fact a case to perhaps delay at least some of the

reforms?

Sure, but very few small businesses engage in imputation credits on dividend

withholding taxes. Very few small businesses do, now…

But they have to go with entity taxation changes and …

Well, entity taxation changes for small businesses aren’t all that complicated and

they were in fact – the entity tax changes were announced in ANTS in August of 1998.

It’s all out there. That was announced in August of 1998 for July 2000, that’s

two years. Now you might say oh well look, two years is not along time, but we only have

Parliamentary terms that go for three years and if we sit around and we’ll say

we’ll give away the first two years and run an election in the third we’ll never

get anywhere in this country. Really, we’ve, you’ve got to keep moving on all of

these things.

Has Mr Downer given you the opportunity to sign the petition?

No, I haven’t signed it and I haven’t been shown it. No.

You said the reforms are very technical and undoubtedly that’s correct

(inaudible). But do you still see these potential changes in business tax in much the same

light (inaudible) which is, transformation of the Australian economy if it makes the right

decisions.

Oh yes. Look, this is the chance of the decade in business tax. This is the chance of

the decade. This is a complicated area which takes political momentum and will to drive

changes. Now, we don’t do it now, it won’t be done for a decade. The business

taxation system will just atrophy and become a weight on Australia. Now, people can say,

oh well, you know, you’ve got indirect tax changes, you’ve got income tax

changes, you’ve got family assistance changes, you’ve got Commonwealth-State

changes. We can finish off the picture. We can round it out and finish it off. And then if

we do it right, Treasurers for the next couple of decades won’t have to worry about

tax reform. Tax reform is something you should do about, I don’t know, once every 50

years or so.

Who are going to be the winners out of this transformation of the economy? Which

industries are going to win this?

Well, I don’t sit down and look at it as which industry is winning vis vis

another industry. I don’t think you can devise tax systems like that. Should we sit

down and say, that we’re going to design a tax system to help him and punish him? I

mean, the more you sit down and have these special rules, the more complexity you get into

your tax system, the more the compliance costs mount, the more you get into the situation

where we are. That’s how we got where we are. I think if you are designing tax

systems, the only thing you can do is try and produce the fairest, simplest tax system

which is neutral as far as possible and in which the right investment, non-distortionary

investment decisions are made. That’s what I think you should be looking for when

you’re designing tax systems. And you keep your tax system non-distortionary,

pro-investment, you get better economic growth, you get better outcomes for everybody.

But doesn’t the lengthy consideration, Treasurer, indicate that rather than

building a new tax system from the ground up, the outcome is more likely to be a political

compromise. I mean, people like John Anderson would consider that depreciation now, they

think they’re quite happy with the way it’s looking.

Well look, when I started out on this, don’t underestimate this, my intention was

always to produce a tax system which would be sympathetic to rural Australia. I

didn’t, nobody had to, sort of, tell me to do that. We’ve always been looking at

that and it’s always been uppermost in our mind. I’ve made this point before. I

mean, in the four years that we’ve been in office we’ve always tried to design

tax arrangements sympathetic to rural Australia. Always. From Landcare rebates to farm

managements deposits, all of these decisions. And so we’ve got to keep those sorts of

things uppermost in our mind and we all do that. We all do that.

(inaudible)

Well, the greatest beneficiaries of indirect tax reform are manufacturers. Let’s

put this in context. The whole GST was pro-manufacturing. Why? Because we had a narrow,

goods based indirect tax system. Worn by whom? Worn by manufacturers. And we came along

and we took this load off the manufacturing base and we spread it. Didn’t take it

completely off, there’s still a 10 per cent tax on goods, but it’s now on

services as well. And that meant, for example, they weren’t carrying 22 per cent. And

the reason why manufacturers have so strongly supported tax reform is that they were major

winners. And if you’re an exporter you’re a double winner, because we took all

of the embedded taxes out of exports. Now, this was the greatest pro-manufacturing,

pro-export tax reform that you’ve seen. And when we come to the remaining part of

business tax we’ve got to make sure you see it as a whole picture.

Treasurer, if you do reduce the company tax rate to 30 per cent, would you also like to

see a system where companies actually pay it?

Well, I make this point. There are some people who have said to me, oh, we’re not

interested in company tax reductions because we don’t pay company taxes at anything

like the legislated rate. Now, that’s not an argument that really washes all that

much with me. I’m interested in the people who are doing the right and proper and

honest thing, who I think need relief. And for people who are not burdened by that to say,

that we’re against giving other people relief because we’ve never found

ourselves caught by these laws in the first place is hardly an argument against tax

reform. You know what I think we ought to do? I just think it’s the same principle in

relation to indirect tax. Everybody pays their fair share and no more. And if you’ve

got people paying fair shares, you should have lower rates. But the argument, that

I’m not interested in a lower rate because I’m not even interested in paying a

fair share is not likely to wash with me or with the Australian people for that matter.

(inaudible) who pay their fair share have been repeatedly over the years it seems

unsuccessful.

Well of course, because, you know, you’ve got so many concessions and so many

opportunities, those that have resources can exploit them. And, you know, you can play

this game of trying to chase the concessions, you can play this game of trying to chase

the exploitations, you’re better just not to open weaknesses in the net in the first

place – that’s a general principle of tax.

You’ve given a very strong guarantee that the farming sector, the rural sector

will be better off with your tax reforms. But you’ve also said that . . .

Which tax reforms?

The business tax reforms.

Oh yeah, well they’re better off under the ones we’ve already done. I mean .

. .

You’ve also said that manufacturers have been the biggest winners out of the GST.

Do you have any sympathy for the view that the mining industry doesn’t win out of the

GST and could be the biggest losers, at least in the top end of the industry, from the

abolition of accelerated depreciation?

Mining has been a major winner from indirect tax reform. And you would’ve seen

some work, I think it was published, I better not name the newspaper, I think it was in

your newspaper, from Econotech on the weekend . . .

And our newspaper.

Well, in your newspaper too. Lots of good newspapers in this country. Showing the

benefits to mining. Mining is nearly in Australia, nearly totally an export industry. And

when you took embedded taxes out of exports, mining was a major winner. Mining also was a

winner in relation to diesel and diesel fuel rebates, and also a major winner in relation

to reductions in transport costs. And you have a look at the work, mining has been a major

winner from indirect tax reform. A major winner. And the point I make is, when you’re

looking at the overall tax and I’ve said this before. You know, you’ve got the

indirect tax system – the I.T.S; the personal income tax system – the P.I.T.S;

the business income tax system – the B.I.T.S. The ITS, the PITS and the BITS. And

you’ve got to look at the ITS, the PITS and the BITS, you’ve got to have it as a

full picture. You’ve got to see how it all works out and you’ve got to make sure

that they all work together to give a competitive tax system. But to say, oh, I was a huge

winner out of the ITS and we now come back to square one in the BITS, is rather trying to

divide your canvas and do abstract art.

Thanks very much.