Transcript No. 99/22

Hon Peter Costello MP

Doorstop Interview

Tuesday 30 March, 1999

1.30 pm

E&EO

Tomorrow the Government will be introducing legislation into the Parliament to

increase the level of assistance to families in Australia. In accordance with our policy

we’ll be introducing new laws which will give for every dependent child an increase

in the tax-free threshold of $2,000 and for single income families with a child under 5,

an increase in the tax-free threshold of $5,000. So, for a family with say two kids, one

under 5, you’ll be getting, under the Government’s new tax laws, an increase of

$5,000 for the child under 5, another $4,000 for the two children, which is $9,000, plus

the $6,000 tax free threshold. A $15,000 tax free threshold for families with two kids

which will dramatically improve the position of families and of course it’s in

addition to improving the income tests and the taper rates and also reducing income tax.

So, unquestionably under tax reform families will be better off. Now I see the statement

that was put out today by some welfare groups and others. It’s got no new analysis,

no new facts, basically just a press release without any analysis to it. And I point out

that when ACOSS put out its own analysis of the Government’s tax package, which it

had done by the Melbourne Institute and it was put to the Senate Select Committee, it

found that each group was better off as a result of tax reform. By varying amounts, by

between 2 and 3.4 per cent all groups were better off. Aged pensioners 3.3 per cent better

off, couples 3.3 per cent better off, sole parents 3.4 per cent better off. So ACOSS’

own research has concluded that under tax reform low income earners will be better off.

The statement that’s put out today doesn’t have any new analysis or any new

facts and notwithstanding the fact that people have gone through tax reform, backwards and

forwards now for the best part of a year, still have not identified any sub-group that

will be worse off as a result of tax reform.

Mr Costello what’s your response to February’s trade figures?

Well I’ll come to that in a moment. Let’s just deal with tax and I

promise you I’ll come back to that.

Treasurer, Bishop Challen says that if you don’t take food out of the package

we’re going to have a divisive society and it will be unfair and unjust and the poor

will be worse off. Are you giving any consideration at all to removing food from the

package and taking up the option to lower the tax cuts for the higher income earners and

fill some of the tax shelters that ACOSS has spoken about?

Well, ACOSS have not identified any tax shelters, it’s just not right. I

remember early in the debate they saw me and one of the tax shelters that they thought we

ought to look at was capital gains tax on the family home. Now, if you regard that as a

tax shelter you might say that some Governments should put a capital gains tax on the

family home, but this Government won’t. We don’t regard that as a tax shelter.

Now I didn’t hear Bishop Challen make that point but if he did then in England, the

home of the Church of England, you have Value Added Tax. In Italy, the home of the

Catholic Church you have Value Added Tax . . .

But they argue it isn’t on food.

Well, it is on food. In many types of food, they have multiple rates. And once you

start dealing with the tax base you get into incredible complexity. Let’s go through

the evidence here. The food manufacturers, who have the most to lose if you have a tax on

food, say it should be on food because otherwise you’re going to have stores and

supermarkets running two sets of accounts. The Commissioner of Taxation says it should be

on food. The experts that were called into the Senate, Warren, Dixon, Harding said it

should be on food. The international experts said it should be on food. When it was

pointed out to one of the groups that if you took GST off food in fact you give five times

the benefit to 80 per cent high income earners, they said well, they’d be quite

prepared to do that. In other words, quite prepared to give benefits to the high-income

earners. Now, the logical way to do this and everybody who has thought about it for a

moment will say this – is not to have tax inspectors running around putting thermometers

in pies to try and work out whether they’re take away or fresh food; not to have tax

inspectors looking at gingerbread men to try and figure out whether the chocolate is just

an eye, or whether it’s turned that food into confectionery. The logical way to do it

is to increase family benefits, increase pensions, give bonuses to aged persons and

that’s what we’ve done, and on ACOSS’ own analysis, on their own analysis

every group is better off. Now, let me ask this question rhetorically, name the last time

tax was changed in Australia and made people better off? Did it happen when wholesale

sales tax went up in 1993? Did it happen when excise went up in 1993? Did it happen when

the L.A.W. income tax cuts were taken away? Nobody’s ever tried before in the history

of Australia, to my knowledge, to actually prove that tax changes would make people better

off. So we’ve, we are doing an exercise here that’s never been done before.

We’ve got a higher high jump than has ever been put in front of any other Government

and we’ve cleared it.

Treasurer, given the virtues of the compensation package as you’ve expressed

them, do we take it then that you’re not prepared to move at all should Brian

Harradine think that it’s inadequate?

Well look, if Senator Harradine wants to put a debate to us, I will of course

listen. He hasn’t put any debate to us because he hasn’t focussed on this, but

my point to Senator Harradine would be the same point I’m making now, that under this

tax package we can show that poorer people are better off. Now, I don’t think you

could’ve shown that with any other tax package. Let me ask this question again. When

wholesale sales tax was put up 2 per cent in 1993, the poor were worse off. Nobody even

made a pretence of saying they’d be better off, but it was passed by Labor and the

Democrats. When excise went up in 1993 the poor were worse off. Nobody even made a

pretence of trying to see whether they should be compensated. It was passed by Labor and

the Democrats. This is the first time in history that we have actually designed tax

changes to make poor people better off. We have put up a much higher hurdle and we’ve

cleared it.

Are you encouraged by the Australian Industry Group’s support for 30 per cent

corporate tax rate and missing out on the accelerated depreciation allowance?

Well look, I welcome their positive contribution to the debate and I think the most

important thing that the Australian Industry Group said, in what I thought was a very

positive contribution, was we have to look here at national interest we have to look at

what’s going to be best for our country. And in relation to business tax it may mean

that some people have to give a little bit so that the country can gain a lot and . . .

So does that mean there are messages for other industry groups in this, like the

BCA, which want to have two bob each way?

Well, you can’t run two tax systems. This idea that you can have two tax

systems and let people swap between them. This sort of eeny meeny miny mo tax system. You

can’t do that. Tax system is put into law and the rules apply and they’re

administered by an independent officer – the Commissioner of Taxation. And you

can’t let people choose, and pick and choose and move between the two. So,

that’s really not an option.

In the national interest they want a 150 per cent R & D. R & D of course is

very low at the moment.

Well R & D gets a 125 per cent tax deduction. Now, what that means is you get a

bigger tax write off than you actually spend and I think it’s one of the most

generous write offs in the current tax act.

Do you think that other industry groups will take a leaf out of the AIGs book?

Well look, I wouldn’t just say to other industry groups, I would say to

Australia as a whole, it is now 1999, after 99 years of Federation we have a tax act and a

tax system which is a dog’s breakfast. We have the once in a century chance to change

it before the 30^th June. If we miss it then we’ll go into the next century

with a second rate tax system which is just going to deteriorate over time. Now in tax

reform there’s always going to have to be give and take. And the most important thing

to keep in mind is the national interest for business, for wage and salary earners, for

families and that’s what’s been motivating this Government all the way through.

Now, we’ve been through an exhaustive process. Let me ask . . .

Treasurer . . .

. . . let me ask you this question . . .

. . . you didn’t mention the poor. . .

. . . when . . .

. . . then Treasurer.

. . . well because the poor are going to be better off. When Jim Scullin, when Jim

Scullin introduced the wholesale sales tax in 1931, did a hostile Senate spend seven

months looking through it trying to find people that were worse off? There were whole

categories of people that were worse off when the wholesale sales tax was introduced. It

wasn’t introduced with any compensation at all. When the Commonwealth moved to

uniform taxation in 1942, did a hostile Senate go through it for seven months trying to

find somebody that was worse off? Look, when Keating introduced a fringe benefits tax in

1985 whole classes of people became worse off, whole classes of people. Did a hostile

Senate go through it for seven months?

Perhaps that why . . .

Now we, we engage in. . .

. . . it’s in need of reform . . .

. . . well that’s precisely why it’s . . .

. . . because the Senate never had a chance to look it over?

. . . it’s precisely in need of reform because it’s been done bit by bit.

So we sit down after 99 years, we have a comprehensively designed system which makes those

in the lower income levels better off and we put it to the Senate in accordance with what

we put to the Australian people. I mean did Scullin go to the Australian people in 1931

and seek a mandate for wholesale sales tax? No. Did anybody go to the Australian people in

1942 with a mandate for uniform tax? Did anybody go to the Australian people in 1985

seeking a mandate for fringe benefits tax or capital gains tax? No, of course they

didn’t. But, nonetheless they were able to introduce these changes. Did hostile

Senates go through it for seven months? No of course they didn’t. Where I think this

debate is getting away from ourselves is because we have done so much more than any other

Government in Australian Federal history. The bar just gets higher and higher and higher.

Well, we’ve been able to hurdle all those bars.

Now can I do, can I do the current account?

Treasurer, two monthly records in a row, are you concerned that perhaps the trade

deficit is getting out of hand?

Well, I mean, let me make the first point which is, we always have to keep an eye

on our trading position. And what that means is we can’t afford to give up on good

economic policy. And in particular what it means, is, we’re going to have to run a

tight budget and we are going to have to make sure that we keep the Australian

Commonwealth Government in surplus. Having said that, this is the kind of result you would

expect if export prices are at 20 year lows. If export prices are at 20 year lows you are

going to get lower prices for your exports and you either meet those lower prices by

putting the economy under the thumb of heavy interest rates and winding down imports as

well, or you keep a strong domestic economy to give economic growth at a time of external

weakness. Now we want to keep economic growth going. We will not change the world economy.

We’ll play our part in redesigning the international financial architecture but

Australia cannot change the fact that nearly the whole of Asia is in recession. What we

can do is we can make sure we run a strong domestic economy so that people don’t lose

jobs and home owners don’t lose their houses and that’s what we’ve been

doing. And this is the kind of outcome which we forecast. It doesn’t mean we’re

complacent about it, but we forecast and we expect it to occur.

Treasurer, how long can we expect, how long can imports outpace exports without

monetary policy having to play a role?

Well, at the moment we forecast a current account deficit of 5 per cent of GDP

which is lower than all the peaks of the eighties. They all peaked at 6 per cent.

What’s more during the peaks of the eighties, inflation was substantially higher and

budgets were in deficit. So, you can certainly have a current account deficit if you have

low inflation and a surplus budget. Now having said that, that doesn’t mean we get

complacent because the worst thing you would do at the moment would be to run the Budget

back into deficit. Now that’s where we were in the eighties. We’ve got out of

that, it puts us in a stronger position and we’ve got to stay there.

Do you think the current account forecast will be met now or do you think it will

exceed the budget forecast?

Oh well, these figures are consistent with 5 per cent of GDP. So this is what we

forecast and so it doesn’t come as any surprise.

So Treasurer this is a question for being dealt with by fiscal policy not monetary

policy, is that what you’re saying?

I’m saying that in response to a current account deficit it’s important

to keep inflation low and your Budget in surplus and we intend to do both.

Thanks.