Peter Costello

Speeches

2006-07 Budget - Address to the National Press Club, Canberra

ADDRESS TO THE NATIONAL PRESS CLUB

WEDNESDAY, 10 MAY 2006

Thank you Ken, and thank you very much for having me back at the Press Club and can I especially welcome the men and women of the Australian press. Wonderful people. Each and every one of them – whose work I admire and I hope I'll admire it as much tomorrow after today's speech.

When we first came to Government, we laid out for ourselves some fiscal objectives. As time has gone by, those objectives have changed. For our first objective of course was to balance the Australian Budget. You'll hear a word used a lot in political debate today about what the size of the surplus should be. Of course, that was not the question on everybody's lips ten years ago. The question on everybody's lips ten years ago was what should the size of a deficit be?

And over the first two budgets that I brought down, we had a fiscal goal of balancing the Australian Budget and we did it in two steps. 1996 and 1997.

And then once we'd balanced the Australian Budget we set ourselves another goal – what would this goal be? This goal would be to begin eliminating Government debt. That's an objective we set ourselves in two parts. The first to halve it by the year 2000 and the second to go on and to eliminate it.

And we met that objective in the year 2000 and this year with debt free day in April, we met the second part of that objective. We eliminated in net terms Government debt.

And so by now we had balanced the Budget and eliminated debt and we set ourselves now a third target which was to try and get Government net worth positive.

Now these are technical terms but what that essentially meant was could we begin to fund our superannuation liability?

And so we formed a Future Fund. A Future Fund which took its initial deposit last week of $18 billion which will take an additional deposit this year of the surplus from the 2005/2006 Budget which will take a further deposit in the Telstra privatisation process and which within a few years will be well on its way to funding superannuation liability by 2020.

And that's why I said last night - having balanced the Budget, having retired Government net debt, having made provision for positive net worth and the funding of superannuation liability, the next generation of Australians will be able to face the challenges of their time.

We will have so provided that the challenges of their time will be the challenges they have to meet.

Not the challenges of their time and the leftover undone things from our time.

Not the debts of today as well as the problems of tomorrow but the challenges of their own time.

And they're going to need the ability to meet the challenges of their own time because as we've shown with our inter-generational report, they are going to be big challenges.

They are going to have enough on their plate meeting the challenges of their time without trying to make up for the failures of our time.

And that's why we've moved the Australian Budget to the position that it is.

And as a consequence of that, the retirement of all Government debt, our interest payments which you see by that red line, which were costing us $8 billion per annum in 1995-1996 will reduce to zero.

A built in annual saving of $8 billion.

Well some people will say well where does the money come from? That's one of the places. A built in annual saving of $8 billion.

And as I said last night we will face the future and our future challenges here in Australia, stronger because we are free of debt, because we have provision for the future, because our budget is in surplus and our young people will be able to meet the challenges of their time.

Let me illustrate this another way. In 1996 and 1997 we spent as much servicing our debt as we spent on hospitals and schools.

The dark blue was the $9 billion of interest rate payments. It was about the same amount as we are investing in hospitals and schools.

Today we don't pay interest payments. We've been able to increase our investment in hospitals and in schools as a result.

This is forward investment. Investment for the future. Not servicing the debts of the past but throwing forward in order to invest for the future.

And when people say to me well what are you doing for the future?

The first and the most obvious and the clearest answer is we are freeing it from the monkey of debt which has been on our back. Freeing young people of tomorrow's generation from the responsibility of paying $8 billion worth of taxes for our spending and changing those into real investment for the future in relation to hospitals and schools.

Now one of the more recent developments that has also aided Australia is an increase in the terms of trade.

The terms of trade tries to measure the prices we get for our exports compared to the prices we got for our imports.

And as you can see, our terms of trade are at the highest point since really the mid '70s.

You've heard the expression that Australia lived off the sheep's back. And that as the price of wool and commodities declined, Australia began to decline as a consequence. And all the thinking of the twentieth century was – commodities will decline in price and manufactures will increase.

Better get out of commodities and get into manufactures.

The 21st century turned all of that around.

It's manufactures that started declining in price and commodities that started increasing.

Something changed between the 20th and the 21st century.

We now know a big part of the emergence of China and India, or I should say the re-emergence of China and India – as it may well be that the world is going back to where it was in around about the seventeenth century where China and India were world powers, before the rise of the United States.

It may well be that history is re-asserting itself and we're having the re-emergence of great powers like China and India. And what it did is it started sending time backwards. So now no longer were economies looking to get out of primary production and get into manufactures. Manufactures began declining and commodities began to increase.

And I like telling this story because I lived through the tech boom of early 2000. And I can remember all of the negative commentary that there was about Australia. Australia is an old economy they said. The Australian dollar is below 50 cents. You've missed the tech boom. You don't have any semi-conductor plants. You're going to be punished. And all of the commentary in the newspapers was technology was the wave of the future. This expression - new economy – and I used to give speeches which were generally panned – that the old economy wasn't a bad economy, that the old economy was a base economy. That we shouldn't give away our industries like mining and energy.

It's a general boo hooing from the Australian and international press.

Well have a look at that.

If we'd have given away the old economy, around about the 2000 mark, we'd have probably missed the greatest economic development in the Australian economy as a consequence.

Now why do I say that? I say that because these terms of trade will turn too. We're now at a peak in these terms of trade. We'd be foolish to now say well we'll bet the whole future on the mining industry. People turn.

The best economy is a broad economy. A balanced economy. That too will turn just as the tech boom turned and in the Budget we made various assumptions about that. Some people say I'm betting on a commodities boom - we are not. We have our assumptions in the Budget which shows a step down over the two years in the projections back to more normative levels. We do that because we believe that will happen and because we don't want to bet on a long term change in what could be a short term pass through.

But we have taken the time in this budget to do another round of structural reform in the Australian taxation system.

These are the current thresholds and income tax rates as applied today. We have four rates of 15, 30, 42 and 47 per cent. Roughly they cut in at about $21,000, $63,000 and $95,000.

Under the Budget I announced last night, we will shave rates at the upper end and increase thresholds right across the board.

Australia will move to four rates – 15, 30, 40 and 45. At thresholds of 25, 75 and $150,000.

Now there are some people that say well I earn more than a $150,000, I pay 45 cents in every dollar in tax - you do not. You pay 45 cents in each dollar over a $150,000 and that's a point worth making. Everybody gets the benefit of those changes lower down the scale.

Some people say – oh well what about bracket creep? Can I make this point. Eighty per cent of Australians are on taxable incomes of $75,000 or less. As they move up in income they do not go on to a higher marginal tax rate. The great bulk of Australians can move through that income range of $25,000 to $75,000 and that's where the great bulk of Australians are without moving their marginal rate. And in fact only 2 per cent of Australians have taxable incomes over $150,000.

Let me remind you where we were in July '96 and indeed in June of 2000. The lower rate was 20 cents in the dollar. We've cut that to 15.

As you move through the income range of 20 to 50 thousand, you face rates of 34, 43 and 47 cents in the dollar.

As you move through that income range today you have one rate and it's 30 cents in the dollar.

I sometimes hear people say they would like thresholds to be indexed.

If we had taken that $50,000 threshold and indexed it in 1996, today it would be $64,000 dollars.

That is you would be on the top tax rate at $64,000 dollars.

A good thing we never indexed that rate.

Because if we had you'd be paying that rate on a lot more of your income than you will be now.

You'll be paying that rate on incomes now of over $150,000 dollars and of course that rate is also a lower rate of 45 rather than 47 cents.

The red lines show the tax cuts in percentage terms. The largest tax cut in percentage terms under this Budget is for people earning $10,000. They have a tax cut of 100 per cent.

And then it shades out through middle income earners and higher income earners to around about 6, 7 and 8 per cent. In dollar terms, the blue bars – it's greater at the upper income end but that's because people are paying more tax at the upper income end.

In distributional terms, the greatest percentages go to the lower income earners.

And some people say well why did you feel that it was necessary to cut that top marginal tax rate?

Well one of the things that the benchmark of international taxation arrangements showed was that the average top marginal tax rate in the developed world was 46.7 cents including social security contributions. Ours with the Medicare levy was 48.5. We were above the average.

And this two per cent reduction will take us down to the average and our threshold up to a point which will put us in the top third of comparisons with the developed world.

We've made big progress. The tax system is more competitive. It will give more incentive. It is more in line with developed economies and it means for most Australians they will not be facing an increase in marginal tax rates over the course of their working lives.

Now in addition to this for families the Government has introduced increased family payments.

By enhancing access once upon a time, or I should say now, you got cut out of the family tax benefit once your income went over $33,361.

You'll still continue to receive that maximum rate up to $40,000 as a result of changes I announced last night.

The large family supplement will be extended to families with three children. Those that have one for Mum and one for Dad and one for the country will now be recognised and if they have more they'll be recognised even more as a consequence of the changes.

Childcare places have been uncapped. There will be no Government limit on childcare places. If there is a demand, an eligible group can meet it and get Commonwealth funding.

The maternity payment will increase to $4,000 dollars and that even applies to first children on the 1 st of July and the childcare tax rate rebate will become payable from 1 July as well.

And so in those middle income ranges of 40 and 50 thousand, a family with two kids will be $30 a week better off and a family with three $40 a week better off. Real money back into the pockets of Australian families.

We have also announced changes which will improve the situation for self-funded retirees and those who are on pensions. I've been asked on talkback radio a number of occasions already this morning – is there anything in this Budget for pensioners? And of course there is. There's a payment of the utilities allowance of a $102.80 before the 30 th of June an additional payment in addition to their annual entitlement, an entitlement which we introduced in the year 2005.

And the second leg of our tax reform plan after restructuring income tax rates and thresholds were changes to business taxes.

Our changes to business taxes have two parts. Enhancing depreciation allowances for all Australian businesses on the diminishing value basis and enhancing small business taxation in particular. And I think once people start delving in to see the changes that have been put in place for small business they'll begin to understand that this is a major restructuring. Increased access to the simplified taxation system. Increased access to the capital gains tax concessions. Increased alignment of thresholds. Increased simplicity in relation to those tests. More opportunity for small business which is a big part of this particular Budget.

And the third and perhaps even the biggest part of what we announced last night, was the biggest change to superannuation in taxation terms for at least two decades. And the best – because the big change two decades ago was a bad one. And this was a good one.

The big change two decades again was the pulling forward of taxation onto contributions. It was the 1988 changes that meant that we had taxes on contributions and on earnings and on exit.

And there were two ways of addressing this problem. We could either take it off contributions or take it off exit.

If you took it off contributions you would complicate the system even more. Because you would then have to try and allocate in lump sums what had been gained during the period of the contributions tax and what had been gained afterwards.

You would have to try and re-allocate entitlements in relation to pensions.

And the complexity for those that are currently dealing with end benefits in relation to superannuation is already enough. If you have a pre July '83 contribution, 5 per cent is taxed at marginal tax rate. If you have a concessional contribution 5 per cent is taxed at marginal tax rate. If it's an undeducted contribution that part is exempt. For invalidity post June of 1994 that part is exempt. If it's a capital gains tax roll in that part is exempt. If it's non-qualifying, that part is taxed at marginal rates. If it's post June of 1983 you have a threshold and if it's excessive it's 38 per cent.

How easy is that?

And during the course of your life you're supposed to keep track of your eligible termination payments, over the course of your life, to ensure that you don't exceed the reasonable benefit limits and comply with age based limits. And people coming up to retirement are faced with all of that and they've said now what would you like?

I think most would probably say a Bex and a lie down.

A lump sum? A complying pension? An allocated pension? You tell me.

And at a time of their life when they're facing retirement and they're looking for certainty, that's what they'd be getting. Under the plan that we announced last night, from the 1st of July 2007 that will be replaced by that.

If you're over sixty, no tax. No tax on a lump sum. No tax on a pension.

Even I could understand that.

It's the same in relation to pensions. In relation to pensions if you decide to take a pension – marginal tax rates, less deductions for personal contributions, plus a pension offset maximising at fifteen per cent. Putting you into the taxation system with other income coming on top.

Under the proposal that I put last night, no tax.

And what this means of course is that if people want to save – superannuation just got a lot more simple and attractive.

Now there will be limits as to how much you can put in. The limit we propose is $50,000 a year. There will be limits. But they won't be limits like reasonable benefits limits and they won't be limits like age based limits. There will be limits because this is such a concessional vehicle. But over the course of your life to put in $50,000 a year makes this very, very generous. And when the money comes out it's tax free. So that if you want to continue in the workforce it's not taken into account for your taxation. Two days in the workforce you still might be on that low fifteen cent or thirty cent rate. Whereas if it's in the tax system drawing superannuation and being in the workforce would bulk you up into the higher taxation rate.

This is pro saving. It's simple. It encourages people to stay in the workforce and it deals with that great demographic change that we in Australia are now coming up against.

This is far sighted reform. It must be because nobody predicted that it would be done in this particular Budget.

This is far sighted reform that will set Australia up for long term opportunity.

Now I would expect that people will find flies in the ointment. They normally do. And there's a whole industry out there which is paid to do so. I'm waiting for those flies to fly in.

We've got twelve months. If anybody finds any problem in relation to this with transitionals or a hard case, I'm very happy to discuss that, but that's where we're going. We've signalled it in advance. We are going to consult until August and then we're going to move to a legislative phase.

This is pro savings.

And so out of this Budget we get a re-structure of the income tax provisions. We get pro-saving. We get a new saving system which will give incentive to maintain connection with the workforce to the older Australians of whom we know we are going to have many more proportionately as the years go by. It delivers benefits to families and it does it within the context of a balanced budget, no debt and a Future Fund which will meet our future liabilities.

Now I haven't got time to go through all of the other measures of investment which I announced last night.

But investment in road, in rail, in water. Investment in areas which will boost the capacity of the Australian economy was very prominent in last night's Budget. The biggest investing Budget that we can remember in this country for a very long time. But more importantly than that. The great reforming Budget which puts together a tax plan in income tax, in business tax, in superannuation which will design – be designed to meet the challenges that we know are coming with the ageing of the population and the demographic change and which will set Australia up for opportunities, which we know are in front of us and which we know we need to take to avoid the challenges of the future.

We are not betting on a commodity boom lasting for a long time but we are taking the opportunity to strengthen our economy now for the future opportunity and the future challenges which lie in front of us.

This is a Budget of future opportunity, of investment and of reform and it's a Budget which will give Australia opportunity in the future.

Thank you very much.

 

Address to the National Press Club - Slideshow [.pps, 751KB]

10 May 2006

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