Peter Costello

Speeches

Address to CEDA: Economic and Political Overview

ADDRESS TO
CEDA - ECONOMIC AND POLITICAL OVERVIEW

HOTEL SOFITEL, COLLINS STREET, MELBOURNE

29 JANUARY 1999
1.00 PM

Introduction

During the course of this CEDA Conference, you have had a number of speakers talk about the economic and political outlook for 1999. One of the things they will have addressed is the issue of the republic and the referendum to be held later this year.

I stated my views on this issue at the Constitutional Convention last February. I have not added to them since.

I said then, "…..the temper of the times is democratic: we are uncomfortable with an office that appoints people by hereditary. In our society in our time, we prefer appointment by merit.

"The unease at the centre of our constitutional arrangements is not because they do not work but because the symbols which underlie them are running out of believability – and this will gnaw at legitimacy.

"I am for change. I would like to see Australia deal with the issue of a republic – not because of what others think of us, but because of what we think of ourselves…..".

The model which secured the most support at the Constitutional Convention was for a president to be elected by a two thirds majority of both houses of parliament, perhaps best described as a ‘parliamentary’ republic. It is opposed by those who want an elected president - a system perhaps described as a ‘popular’ republic. The parliamentary republicans sought to graft on some ‘popular’ features to the model, particularly in the areas of nomination and selection of candidates. Whether and how it can be done is an open question.

And the Convention went further than just dealing with the Head of State. It recommended a new constitutional preamble referring to, interalia, Aboriginal occupation, multiculturalism and possibly gender equality. It left some issues unresolved and called for further work to be done on the substantive issues, for example, the issue of prerogative powers.

My judgement is that the greater the number of issues that are put into the referendum, the greater the number of opponents there will be.

And I mention these things to make the point that there are a lot of substantial issues not yet determined. Indeed the form of the constitutional amendment is not yet settled. There is a huge amount of work still to be done.

After the Constitutional Convention I indicated I would work to play a constructive role in the work that has to be done – I would like to see a proposal that is workable. And I will. I expect that the referendum will take place at the end of this year.

But presently there is much more important work to be done.

The referendum debate is largely about symbols. Symbols are important.

But presently we are engaged in a great enterprise which will have more practical outcomes for many more people – which will determine whether more families have higher living standards, whether we secure a revenue base to provide hospitals for the sick and pensions for the old, whether we grow our economy, whether we give wage and salary earners much needed tax relief. This work will determine whether Australia will be at the forefront of the nations of the world or whether it loses this historic opportunity.

This is the important political and economic issue that our country faces at the moment.

Tax reform now will secure us the opportunities for the first decade of the next century and beyond. It is the policies that the Government laid down in 1996 – three years ago – when it came to office that are reaping the benefits Australia enjoys now. It is what we do now that will determine our outcomes in 5, 10, 15 years from now.

Where are we now?

When this forum met last year, many commentators and analysts had a very gloomy view of Australia’s economic future. We were six months into the Asian economic crisis. We had no experience of an Asian recession. All our experience was of Asian growth. In the early 1990’s we had managed to do badly whilst Asia boomed so it was a fair bet we would do worse as Asia bottomed.

The situation in Asia was serious – the worst we have ever experienced. Some in the media were keen to suggest Australia was the next domino. They did not misread Asia. But they did misread Australia.

For example the Financial Review in February stated that "Evidence of a slowdown in Australia’s economic growth rate in the second half of 1998 due to the Asian financial meltdown continues to mount". AFR headlines such as "Early Shockwave Hits Australia", "Asia Crisis Impact Worse Than Predicted", and "Modellers Don’t Share Costello’s GDP Optimism" give a flavour of the coverage.

At one stage during the election campaign the Review breathlessly announced that Treasury had secret pre-election forecasts which downgraded growth. Of course this was totally untrue. And of course these claims were endlessly repeated by Labor.

The Labor Party claimed on 14 July 1998 "…..the last thing John Howard wants is the next set of national accounts figures which are unquestionably going to show the economy now going backwards as a result of the impact of Asia."

In fact, the June quarter National Accounts (revised) showed growth of 0.9 per cent in the quarter and 4.3 per cent through the year. The September National Accounts showed growth of 1 per cent in the quarter and 5 per cent through the year.

This was higher than all the major economies of the world.

During 1998 we had a total divergence between what was happening to the economy and what was reported to be happening. Our performance wasn’t just exceptional compared with our Asian neighbours.

It was stronger than the US – an economy hailed for its strong economic growth, stronger than the UK, stronger than Germany, stronger than all the G7 nations, and more than double the total GDP growth in the OECD.

IMF Deputy Managing Director Stanley Fischer described Australia as "having really done remarkably well", National Australia Bank Chief Economist the chief gloom prophet, recently described the economy as "stunning".

Writing in Fortune Magazine in December 1998, Paul Krugman said this: "Australia, in case you didn’t know, is the miracle economy of the world financial crisis."

Inflation, during the last three years has averaged around 1 per cent per annum. This was boom growth on historically low inflation. Low interest rates – together with solid capacity utilisation and high levels of corporate profits – have underpinned strong growth in business investment.

Low levels of interest rates and solid employment growth have seen solid growth in consumption.

The lowest mortgage interest rates in a generation have supported dwelling activity. The lowest small business overdraft indicator rate in thirty years has supported small business. This has all contributed to strong growth in domestic demand – which together with modest real wages growth has delivered solid employment growth.

Employment grew by 2.1 per cent in 1998.

The unemployment rate fell to 7.5 per cent in December, reflecting the resurgence of employment growth in the second half of 1998. This is the lowest unemployment rate for a decade.

There are almost 400,000 more Australians employed today than when the Government came to office in 1996.

The Budget is in surplus. We are on track to halve Labor’s debt to GDP ratio. Economic growth is around 5 per cent. Australia is outstripping the world notwithstanding the region is now in near total recession and in some parts, in depression.

A significant feature of Australia’s response to the Asian crisis has been the ability of exporters to divert sales away from weaker Asian markets to more strongly growing markets in North America and Europe.

The depreciation of the Australian dollar over 1997-98 cushioned the income of commodity exporters.

But the depreciation also offered an opportunity to Australian exporters.

An opportunity that they were able to exploit as ongoing reform in product and financial markets that this Government has pushed ahead continued to improve the ability of business to adapt to change.

How we got here

The "stunning" performance of the Australian economy in 1998:-

  • Is the result of credible, transparent and forward-looking framework for macroeconomic policy.
  • Is the dividend from introducing an independent framework for monetary policy that has enhanced policy credibility in the financial markets.
    • Despite global economic uncertainties and the deprecation of the Australian dollar, we saw bond rates falling over 1998.
  • Is the consequence of the Government eliminating a massive budget deficit and bringing the budget into surplus a year ahead of schedule along with surpluses right across the forward estimates.
    • The Commonwealth has not borrowed in net terms for three years. In fact it is now paying money back into capital markets.
  • Is helped by low interest rates, arising from low inflation.
  • Is the outcome of pursuing major ongoing reforms in product, labour and financial markets.
For example:
    • A floating exchange rate.
    • Industrial relations reforms and reforms to the job network contributing to better labour market outcomes.
    • Reforms in the finance sector which are acknowledged as being at the forefront of international best practice giving careful, responsible prudential regulation.
    • Comprehensive corporate law reform improving confidence, efficiency and the environment for investment and growth.

But this is not only my assessment of why the Australian economy has recorded what is being acknowledged as an exceptional performance in 1998. This is also the assessment of international economic institutions such as the IMF and OECD.

Late last year the IMF in its November Public Information Notice noted "Growth has been underpinned by an improved economic policy framework and regulatory reforms that have prompted investment and boosted activity."

The IMF’s Deputy Managing Director said in November last year, "……the policy framework has changed amazingly. You have a very coherent monetary policy now; and you’re running a fiscal surplus now. There are very few countries running a fiscal surplus".

The collapse in Asia brings home starkly the cost of inadequate corporate governance and prudential regulations.

It also highlights how starkly the Australian economy differs in fundamental ways to our neighbours and is one of the reasons why the Australian economy has forged ahead while many Asian economies are in recession.

Indeed, the crisis in Asia contains an important message for the private sector, international financial institutions and governments about how strong the case is for enhanced transparency and accountability.

Corporate governance and prudential supervision are at the forefront of issues being confronted by the IMF and APEC Finance Ministers and Australia is playing an active role in taking these issue forward.

Australia is well placed to do so because we are at the top of the class.

The IMF recently hailed the policy measures that followed the Wallis Inquiry as a "package of pathbreaking reforms, which puts Australia at the forefront of international practice".

In addition, the Corporate Law Economic Reform Program (CLERP) is modernising fundraising, takeovers, directors’ duties, corporate governance, financial reporting and conduct and disclosure practices in financial markets.

In short, the Australian economy is where it is because the Coalition implemented the right policy. They were not easy policies. But we cared enough to do the right thing.

And this is an important point. While we were implementing these policies, we were opposed every step of the way. Labor shamelessly campaigned against every step on the road of economic responsibility.

Labor’s Legacy

  • Labor opposed the 1996 Budget measures designed to take the Budget out of deficit – their deficit.
    • In fact so strongly did Labor oppose economic responsibility that Cheryl Kernot marks this as the point when she decided to become Labor:- final evidence that Labor had changed from its policy of economic management.
  • Labor threatened to sue the Government for adopting an independent monetary policy.
  • Labor opposed privatisation.
  • Labor opposed competition policy.
  • Labor opposes tax reform.

Labor predicted that all of the hard yards were unnecessary and would lead to low growth or recession. On 16 July last year Kim Beazley was still saying that the Coalition had taken a "baseball bat" to the economy in our first Budget.

Since the performance of the economy has been so strong this line got unsustainable. Labor’s line changed late last year.

No longer did Labor claim the economy had been ruined. In fact it claimed the economy had been saved. No longer did it claim the Coalition was responsible. Now it claimed the responsibility went to Labor.

According to Kim Beazley on 3 December 1998 "….in so far as we are fire proofed from the impact of the Asian crisis, it is due to the harsh and difficult changes that we had to put in place during the course of the 1980’s".

Give credit where it is due. Labor:-

  • Floated the exchange rate.
  • Privatised Qantas, Australian Airlines and the Commonwealth Bank.
  • Reduced tariffs.
  • Introduced competition policy.

All these policies were positive influences in developing a more flexible economy that could adjust to external shock. The problem is that Labor now opposes most of these policies. If Labor were supporting credible economic policy it could take some credit. But since it opposes them it must disown its successes.

In his recent paper, Economic Policy and the Third Way, former Labor frontbencher, Mark Latham, describes Labor as, "an opposition which sees its role as exploiting the change process. It tries to feed of the discomfort governments inevitably encounter in having to manage the consequences of economic and social change……since 1996, Federal Labor has used this approach."

"Too many politicians have given up on explaining things to the electorate and instead simply joined the culture of complaint. Labor needs to avoid this trap. It needs to avoid repeating the mistakes of Bob Carr in New South Wales: opportunistic in opposition, followed by broken promises and pedestrian policies in Government."

Why do I make this point now? It is because we are having a repeat performance on tax. Why does Labor say it opposes GST but would not reverse it if it became a Government?

Let us use the words of Mark Latham: "…..an opposition which sees its role as exploiting the change process. It tries to feed off the discomfort governments inevitably encounter in having to manage the consequences of economic and social change……".

Implementing a new tax system is an important part of the integrated policy framework. It is another illustration, perhaps the leading illustration, of the Coalitions approach of focussing on the right policies rather than the easy policies.

We did not underestimate the task of going to the Australian people at the last election and asking them for a mandate to reform Australia’s outdated tax system. It was not the easy thing to do, but it was the right thing and this was recognised by the electorate.

Similarly, we do not underestimate the task ahead of us. We have Labor members sitting in an expensive inquiry re-running all their political lines from last election. To quote Latham "……politicians (that) have given up on explaining things to the electorate and joined the culture of complaint….".

You have yet to hear any Leader of Labor say that they accept the outcome of the October election. This is astounding!

We need a tax system that can provide a stable and equitable revenue source to fund important government services, such as schools, roads, bridges and hospitals. This means a system that can deal effectively with the many pressures facing our existing system.

While the words ‘reform’ and ‘architecture’ have been used a lot in recent times in the context of the world financial system, they are most apt in the context of our tax system. The very architecture of our taxation system is in need of fundamental reform.

This is not surprising given the genesis of the income tax system in the 1930’s – for 1930’s economic conditions. Not surprisingly, the tax system has been unable to keep up with changes in the structure of the Australian economy. As a result, the current system is exhibiting signs of its inadequacy and fragility.

This Government will not stand by and let the taxation system fall further into disrepute or terminal inadequacy.

In the light of the evidence of a tax system under great strain, it would be irresponsible of a government to stand idly by. We need to fix the system now, to make our economy stronger, generate jobs and improve our living standards.

Fixing the tax system is part of the integrated policy framework necessary to ensure stronger economic and employment growth, and rising living standards.

And an integrated part of this is lower personal income taxes. Let me say this loud and clear. Australians need lower income taxes.

Of course, to realise the full potential of tax reform requires more than Government action alone, it requires the active support of people who think right policy is more important than easy policy. And after we have reformed income tax, indirect tax, family payments, Commonwealth/State relations, we want to move on and reform business tax.

The first two discussion papers from the Ralph Review have already been released and have attracted extensive interest.

The third paper – a discussion paper dealing with issues involved in the taxation of investment and entities – will be released shortly and will form the basis of further consultation and submissions.

The Government has decided to extend the date for Mr Ralph to report to not later than 30 June 1999 to allow sufficient time for consultations with the many interested groups representing small, medium and large business as well as rural and farming business.

I urge you to carefully consider the proposals in the paper and to make a contribution to the taxation debate. Our success in improving Australia’s business taxation system will depend for a large part on businesses’ participation in the Review processes.

By the end of the year 2000 Australia can have a tax system relevant to the twenty-first century and comparable to the best in the world.

Conclusion

In a time of international economic and financial uncertainty Australia has demonstrated exceptional resilience to the unfolding economic crisis.

This resilience has been built on the Government’s successful mix of economic policies. These policies set the condition for the strong domestic growth that Australia has enjoyed and enhanced Australia’s capacity to adapt to sweeping changes in global market places.

The challenge facing Australia is to ensure that our capacity to compete in these difficult times is strengthened. This means redoubling our efforts to remove impediments to growth; it means maintaining our commitment to prudent stable macroeconomic policy; and it means continuing to pursue and implement microeconomic reform. It requires repudiating the populist politics of those who falsely promise a painless path with easy gain.

Labor did some good work in the 80’s (and had the support of the opposition to do it). Labor undid a lot of that work in the 90’s. And it was up to the Coalition to do the hard yards, the right policy – and do it against some very cheap opposition. And it is clear we will have to do it the hard way again.

This could be the worst opposition Australia has ever seen.

The recent Asian economic crisis and international financial crisis represents perhaps the greatest challenge to the welfare of our nation since World War II.

And we have risen to it so far. But it would be foolish to think all the work is now over. It would be foolish to think we can stop now. Economic reform is as important as ever. The moment we stop is the moment we are at the greatest risk. The stakes for benefit or loss are much higher than ever. Which makes the work more important than ever. This is the issue for our country in 1999.

29 Sep 1999

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