Transcript No. 66

Hon Peter Costello MP

Press Conference

Tuesday, 17 November 1998

2.30 pm

SUBJECTS: IMF Report, Tax Reform, Special Premiers’ Conference

Accompanying my press release today is a Public Information Notice published by the International Monetary Fund and either released or about to be released in Washington reporting on the IMF’s consultation with Australia. This is the first time a Public Information Notice in relation to these discussions has ever been published by an Australian Government and we publish it in the spirit of showing greater transparency and also showing our own commitment to be part of IMF moves to encourage more transparency amongst countries on the international stage.

The Public Information Notice, the result of the consultations that were undertaken by the International Monetary Fund, provide a very strong endorsement of the Government’s economic management and a very strong endorsement of the performance of the Australian economy as a result, over the last year.

The Public Information Notice which is, if you like, a peer assessment by the countries of the world, through the IMF and their representation on the IMF, indicates that the Australian economy continued remarkably well in the face of the Asian downturn; that a major contributor to that was the way in which the Government had put together a fiscal consolidation strategy and put the Australian Budget back into surplus, together with the changes that the Government had put in place in relation to monetary policy and the targeting of inflation, leading the IMF and its Executive Directors to note Australia’s impressive record of strong growth and low inflation. They were the words that the IMF used.

The Directors noted that the mix of monetary and fiscal policy would support growth in the future, whilst bringing down the current account deficit. Whilst they noted that unemployment was structurally high in Australia, they gave credit to the Government’s efforts in labour market reform.

They noted the Charter of Budget Honesty which is considered to be world class legislation, state of the art in world terms, providing for transparency in budget policy. And they note in particular Australia’s financial sector reforms which the IMF says, “will put Australia’s prudential regime at the forefront of international practice”. Australia is leading the world in terms of fiscal policy, in terms of financial sector reforms and in many other areas as well.

I would particularly also draw your attention to the comments of the IMF in relation to tax reform. The Directors of the IMF, these are country Directors – Directors representing the various countries of the world that are part of the IMF – noted that the introduction of a broad based tax on goods and services would enhance efficiency, protect the revenue base from continued erosion. They cautioned the Australian Government against granting concessions that would introduce distortions and erode the benefits.

Now, in relation to tax reform, you’ve got the Commonwealth Government, you’ve got six States, you’ve got two Territories, that are going to be part of this tax reform process. You’ve got the OECD that recommends tax reform. You’ve got the IMF Directors that recognise and support tax reform. You’ve got international opinion, domestic opinion, as represented in the election, and as represented through all the Governments of Australia, which came to historic agreement last Friday. And apparently, the only people who consider that they’re right are Mr Beazley and Mr Crean. The IMF’s wrong. The OECD’s wrong. The Government’s wrong. Six States, two Territories are wrong. You know, standing in the schoolhouse doors saying wholesale sales tax today, forever, being unable to cope with the necessary changes that Australia needs to continue its impressive economic performance.

Now as we go into the next year and there are obviously going to be external challenges in front of us, it’s important that we continue to work on the economic fundamentals. But as this report today shows, Australia has now got international recognition for the reforms that it’s put in place and the reforms which this Government intends to put in place to take us into the next century.

Mr Costello, you say the six States and two Territories support this. Queensland has tried to cast some doubt on that since Peter Beattie returned to Brisbane last week. What’s your understanding of where the Queensland Government stands?

Well, the Prime Minister issued the Agreement on Principles for the Reform of Commonwealth/State relations which were discussed at the Special Premiers’ Conference last Friday. And the Queensland Government registered a disagreement with one paragraph. As you can see from the Agreement itself, Queensland said it did not agree with the first paragraph of the transitional arrangements. That’s the one area of the Agreement that Queensland took issue with. Now, if you actually look at that paragraph, the paragraph is a guarantee to the States that they’ll be no worse off than current arrangements. Now, Queensland doesn’t say, well, we disagree with that, you know, that we want to be worse off than current arrangements. Queensland wants to go one step further and get a guarantee that they will be substantially better off than current arrangements in the first three years.

So there’s a guarantee that you’ll do no worse than current arrangements in the first three years with States doing substantially better in years four, five and six. What Queensland wanted was the opportunity to do substantially better off in the transitional period, a matter which was not agreed to by the other States and Territories. And that’s why it was only Queensland that took the objection.

But Mr Beattie says he hasn’t endorsed it. Is he just grandstanding?

Well, the Agreement is there and he signed off on every part of that Agreement except for that paragraph. And even that paragraph, he doesn’t disagree with that paragraph, he just wants that paragraph to go further.

Well how do you counter his argument that Queensland’s $465 million worse off?

No, what he says is Queensland, he wants a $460 million windfall. Queensland will not be a dollar worse off, not a dollar worse off. They have a guarantee that they will do no worse than current arrangements. If this were not to come into place, then the current arrangements would continue. We have guaranteed they will be no worse off. What Mr Beattie is saying is, he would have liked a $400 million windfall in those three years, and what he in fact got was a guarantee that he’d be no worse off. Let’s go a step further however, Mr Beattie also knows that this is the guarantee for the first three years and in the fourth year he appears to get a $400 million bonus. An unquestioned $400 million bonus in the fourth year. What he would like is a $400 million bonus before that as well.

Senator Colston, whose vote is crucial in the Senate, seems to be supporting Mr Beattie on his claim for a greater share for Queensland. How are you going to deal with his demands?

Well, we will of course discuss them with Senator Colston. We have no trouble having discussions with Senator Colston. In fact, I would commend Premier Beattie for entering into discussions with Senator Colston. I think that’s the right way for Labor Premiers to behave. You see, ask yourself this question: when Premier Beattie – second most senior Labor office bearer in the country – comes to Canberra, does he negotiate with Kim Beazley or John Faulkner? No, he negotiates with Mal Colston. Why? Because Labor have made themselves irrelevant to the tax reform debate. Labor is now irrelevant to the tax reform debate. And so who carries the hopes of Labor Queenslanders? Senator Mal Colston. And you have, I would have thought, an extraordinary rebuff to Mr Beazley and Mr Crean, that when Premier Beattie comes to Canberra he doesn’t want to see them or deal with them. He wants to deal with Senator Mal Colston and you know you could say the same in relation to Premier Bacon in Tasmania – his hopes ride on Senator Harradine, not on Kim Beazley or Simon Crean or John Faulkner but on Senator Harradine, Labor has become irrelevant to tax. As I said earlier, standing in the schoolhouse door, saying “wholesale sales tax today, tomorrow, forever.” And as everybody knows the wholesale sales tax is endorsed by no one. Not by the IMF, by the OECD, not substantively by the States and the Territories, you know, it’s Simon Crean, Kim Beazley, Ghana, Solomon Islands and Swaziland, on a unity ticket against the rest of the world.

Have you made any progress in talking to the Democrats?

Well our position is, and remains, that we think that the Australian people have decided this issue. That’s what the election was fought on and that’s what the outcome of the election was. We offered an extraordinarily big concession, to set up four committees, to the Australian Democrats. Just to put this in context – and we want to get a vote, an early vote on this – the original Democrat proposal was for eight committees, reporting at the end of May. Now, if they had reported at the end of May and then waited for a Government response and then the debate had occurred, you would not have got the opportunity to fully debate and vote on this issue before the 30 June. The Government’s position is, there has to be a full debate and vote before the 30 June. Can I point out, eight committees sitting for six months would be the equivalent of four full years of inquiry. The Government proposed four committees sitting for twelve weeks, that’s 48 weeks of inquiry, nearly a full year of inquiry. That was a very, very generous offer that we’ve made and our position still is, that whatever time the inquiries take, the Senate has to be in a position to debate and vote and deal with this legislation fully and comprehensively before the end of June.

Mr Costello, the IMF report notes that unemployment rate has stalled and it also says that it may be possible to accommodate a modest easing in monetary policy. Do you endorse those comments?

Well, of course this report was prepared over a period of time, was certainly prepared prior to last week’s labour force figures. But, the point that I think that was being made here, is that unemployment in Australia has come down to around about the eight percent mark, it may be a little lower, but it’s around about the eight percent mark. And the IMF says it’s important that we address the structural issues that keep it high, and I agree that there are structural issues that are keeping unemployment high in Australia, I do. Particularly labour market legislation, the IMF notes some of the success that’s been achieved in relation to that. In relation to monetary policy I think what the IMF says is; Directors noted that it may be possible to accommodate a modest easing, some other Directors cautioned that a tightening of monetary policy could be called for,

so . . .

What’s your viewpoint?

….so I think the directors who IMF went 50/50 each way on that. So I wouldn’t, I wouldn’t over read the first sentence without putting it in the context of the second sentence.

The June 30 deadline looks a little bit arbitrary and some of your critics might even say it was a little self-interested. Is it not worthwhile with such a big change to make sure that you’re getting not only the broad sweep of it right but the detail right as well taking the time necessary to do that?

Well, it’s not in the slightest arbitrary. I could take you back to our policy that was put out before the election, which had a timetable and which states quite clearly before the election, before the result was known in the Senate, passing of the legislation in the first half of 1999. Now that timetable was laid down as our policy before the election, before the results were in, before the composition of the Senate was known. And the reason was, and we did this very carefully, the work that went into this tax policy, may I say, is more work than anything else we’ve done. Extraordinarily long hours, consultation, more Cabinet meetings. And that timetable was laid down because if you don’t have your legislation through by the 30 June you won’t have your tax system up and running by 1 July 2000. It’s all – international experience shows that the absolute minimum – in fact this will be one of the shortest international periods is 12 months, from the enactment of the legislation to the commencement of the system. And the system for all sorts of reasons, many of which I have explained, has to begin on 1 July, and that timetable was put out there in advance of the calling of the election.

Treasurer, back to unemployment for a second, the IMF also says its important to limit the duration of unemployment benefits to encourage employment search and to scale back other social welfare benefits that discourage labor force participation. Are those things . . . (inaudible)

Well, as you know these have not been the policies of the Government. The IMF makes those recommendations and we note them, but they are not policies of the Government. The Government’s policies in relation to unemployment benefits and social welfare benefits, I think are well known.

Mr Costello, it also, this report also points out that the Directors refer to Australia’s high level of external liabilities of foreign debt. You were highly critical of Labor in the ’96 campaign for its foreign debt levels here. That debt level has increased by many billions of dollars. Is that one area in the economy in which you have failed?

Oh no, I think that in nominal terms you’re probably right, the debt has increased somewhat. I think as a proportion of the economy it’s been pretty stable, in fact. Having said that, the blow up in Australia’s foreign debt, let’s be frank about this, occurred from 1983 onwards and into the early 90’s. That’s when you took net foreign debt from something like $23 billion to around about $180 – $190 something like that. As a proportion of GDP it boomed. And now as a proportion of GDP it has more or less stabilised and I was extremely critical of that and I still am. And you would’ve heard me in the Parliament – and I don’t have the figures here comparing debt to GDP ratios – at the end of the Whitlam Government, at the end of the Fraser Government, and at the end of the Hawke Government, Hawke/Keating Government, and the burgeoning in foreign debt occurred under the Hawke/Keating Government. But having said all of that, as the IMF here notes, it is important that we don’t give away the savings game. It is important that we continue to build private savings in this country, and of course that’s what our fiscal consolidation was all about – putting the Government into a position where it built savings. And it’s also important that we encourage private saving in this country. This is one of the great economic points of our tax reform proposals to have a broad-based tax on consumption to skewer the tax system in a way which encourages saving by reducing taxes on income and by having a broad based tax on consumption. We are one of the few countries in the developed world that does not have a broad based consumption tax.

In raw political rhetoric Treasurer, in ’96 you made much political capital out of debts of $10,000, roughly, for every Australian, that figure, I believe, is somewhere around about $12,000 per person now. You were willing to make political capital out of that figure now, aren’t you then condemned by the increase in that figure, or how do you deal with that?

No, because I said, and I haven’t come along with the figures here, but I’ve referred to them many times in the Parliament and I’ll pull them out, that the build up in foreign debt occurred under the Hawke/Keating Governments and has, as a proportion of GDP, stabilised since. Now you can make the point in nominal terms, but it’s stabilised as a proportion of the GDP.

But having said all of that, we were the Government that decided to address the savings issue. Let me ask you this question. Suppose the Commonwealth had run $10 billion deficits in the last two years, as was Labor policy, where would we be now with another $20 billion worth of debt? Where would we have been in relation to the Asian crisis if we’d continued running $10 billion debts?

Let’s get this in context the IMF, quite rightly in my view, says Australia can’t lose sight of the savings game but you ought to compare this IMF report with reports that are written on other countries. You know, to have in the midst of the biggest financial crisis of our time an economy that grew at 4 per cent, with a 1 per cent inflation rate, with interest rates which were the lowest on record for business and the lowest for 30 years for home buyers, with a Budget that came back into balance, with no new taxes and with a debt retirement program which had the Commonwealth on track to reduce the debt to GDP ratio by half.

You know, Stanley Fischer was saying the other day: “the Australian economy has done remarkably well, and the policy frame work has changed amazingly”. Paul Krugman was saying even stronger things, which I won’t read out, in the Financial Review. The IMF what has the IMF said: “Australia’s impressive record of strong growth and low inflation”. I’ll just compare that growth; higher than the US, higher than the European Union, higher than the OECD – positive in a region where practically every country is in recession. Go through them: Japan, Korean, Thailand, Indonesia, Hong Kong, Singapore, New Zealand. All in recession and you had an Australian economy which grew at 4 per cent plus.

Now what would the economy have been doing incidentally if Asia had been booming. That’s the point I make. Labor had the Australian economy in recession when Asia was booming, where would the economy have been during an Asia recession?

Mr Costello, you say that the Government chose to release its report for greater transparency but I wonder what would have happened to the report if it wasn’t so supportive of your tax reform?

Well I can’t envisage that that could occur, because for as long as I’ve been following public debate in Australia, and this is going back 10 or 15 years, the IMF and the OECD, right back to when Labor supported tax reform, has been calling for the broadening of the Australian tax base. I’ve seen it in OECD report after OECD report, in IMF report after IMF report. It was no surprise that when Labor had economic policy ,the last time they had economic policy, which is back in the mid ‘80s, they supported tax reform.

This proposition, can I say this proposition, that what Australian needs is a wholesale sales tax – you know I said in the Parliament the other day, can you image the Labor Party going off to the IMF and saying, well you’ve got it wrong, the Germans have got it wrong, the British have got it wrong and the French have got it wrong, the Japanese have got it wrong, the Singaporeans have got it wrong, the whole of Asia have got it wrong. What your countries needs is wholesale sales tax, follow us, Swaziland, Ghana and the Solomon Islands. It’s laughable.

You know only where you were sort of quarantined from international debate could you stand up and utter that proposition and expect to be taken seriously. This proposition from Beazley and Crean would get a hearing nowhere else in the world. Nowhere else in the world. And yet people are prepared to write it in Australia, you know, I think the attitude is poor old Kim and poor old Simon they don’t understand economics and we’ve got to report their position. This is a proposition which would be accepted nowhere else in the world and it’s being put up, you know, with a serious face in Australia.

Treasurer can I ask about the management of the inquiries about GST. You seem to have taken Jackie Kelly off any negotiations with the Olympic Games’ organisers. Is your office also dealing with similar matters from all other departments and Ministers as well?

Yes, we are dealing with the implementation and the transitional issues in relation to tax reform, whether it be sporting events, and obviously that is a major sporting event, or cultural events. It wasn’t really a question of taking Jackie Kelly off. It was always understood that these would be handled at a central agency level and that is the way that it will be done like most tax matters. I mean it’s not a change. That was always the case and always will be the case.

Treasurer will you give an undertaking that every IMF Public Information Notice from on now will be released as a matter of course?

Well that’s certainly my intention whilst I’m the Treasurer. You know this is the first time it’s been done. Nobody else has done this and we do it in the interests of international transparency. As you noted this is an easy one to do, because it’s such a glowing report on the Government’s policy but I hope in the future, future Treasurers will in the back of their mind have the fact that these are going to be released as a reason to keep economic policy good.

We’ve made enormous strides in Australia, we have made enormous strides. And I think that, you know, there are times for reflection when you get the report card, and today is one of them. Sit back and you know, you can be niggardly here or there, but with all due respect, if you compared this report to the reports that are going out on other countries, you will find that we are so far ahead, you will find that this is state of the art, world class reform, the Charter of Budget Honesty, the financial reforms, the fiscal performance. And I think that we ought to stop every now and then and stocktake. And if you do do that, you’ll see that we have come a significant way. But you’ve got to keep that policy rolling if you want to go the next distance. These are very difficult times and if you want to got the next distance you’ve just got to keep the policy going. Thanks.