Peter Costello

Speeches

Address to National Press Club, Budget 2004-05

ADDRESS TO
NATIONAL PRESS CLUB

WEDNESDAY, 12 MAY 2004
1.00 PM

SUBJECTS: Budget

TREASURER:

Again thank you very much for the opportunity to address the Press Club again. It is something of a tradition and it is one I enjoy very much.

I will try and speak without a written text to the themes of this Budget and what we hope to accomplish and I will try and keep my remarks limited. The Press have asked me to do so, many of them have reported that there was an outbreak of patriotic fervour last night and some of them are not feeling as well as they would otherwise be feeling.

So, as far as I am concerned, this Budget really starts from the economic management which lies behind it. Without economic management you can’t do the kinds of things that we have been able to do in this Budget. Without economic management you don’t have people in work. Without economic management you don’t have a low interest rate climate. And without economic management you don’t have a balanced Budget let alone the opportunity to reduce taxes or to help families. And I have laid down the principle really starting with last years’ Budget that if we can look after Australia’s defence and security, fund our health and education systems, balance our Budgets, then we should think about returning to the Australian public.

And we had an opportunity to do that in this Budget, particularly as we came down to the Budget, strong company tax collections between the mid-year and the end of the year, gave us the opportunity to do things that we didn’t have the capacity to do at an earlier stage. And the big move in terms of the revenue side of the Budget from mid-year was essentially in relation to company tax of $1.8 billion. Not because company tax rates rose but because companies are as profitable in this country as they have ever been, with the company profit share as a proportion of GDP at the highest levels that have been measured.

And so, my first proposition to you is, as you would expect in any economic document, that the most important thing is to have economic management. For the seventh time our Budget will be in balance and we will have a surplus. You can see the second red bar in these charts, that is the forecast for 2004-05, a forecast of $2.4 billion in surplus coming off an expected outcome for this financial year of $4.6 billion.

Can I just say to those economic journalists that have asked whether the Budget is stimulatory, it is in the sense that your surplus is declining from $4.6 billion to $2.4 billion in the forecast year and it is in the sense that we are making a payment before 30 June to all Australian families eligible for Family Tax Benefit. But as you can see from a graph like that, it is not a great deal of stimulus that is being delivered to the economy. And as you count back you will see that there are seven surplus Budgets of the nine that I have delivered in Australia since 1996, coming off Budget deficits, really of the order of 4 per cent, as bad as 4 per cent, back in the early 1990’s.

This has put Australia’s debt position in a very strong position. We are the red bars on that chart. Our debt peaked in 1996 when our Government was elected. By running surplus Budgets we have managed to pay down Australia’s debt from 20 per cent of GDP to 3 per cent of GDP whilst other countries have been building debt throughout the same period. You can see all of those countries – the OECD, Europe, Japan, the United States have in fact been building debt over recent years and the reason is that they, like us, had Budget deficits back in 1995-96 as you can see on the blue graphs, unlike us, we drove our Budget into surplus, they are still running deficit Budgets.

And you can see a comparison there between Australia which is on the far right hand side, Japan, the United States, the OECD and Europe all had significant Budget deficits shown by the blue bars in 1995-96, all continue to have significant Budget deficits. Australia is the country that has strengthened it’s fiscal position. It is the country that has paid down debt and we have come through the challenges of the last eight years and there have been many in a stronger position. There are some people that claim, oh well, it has been a good time for Australia. That is rubbish.

During the last eight years we had an Asian financial and economic collapse, we had SARS, we had September 11, we have had war in Iraq, we have had the worst drought in a hundred years. This has been a very difficult period for economic management. And my argument is that it doesn’t happen by accident, it is not a fluke, it requires good choices in difficult situations. It is not something that you can blunder into and luck your way through. It is something that takes determined consistency and consistency in economic management has been a hallmark here in Australia over the last eight years. Whilst our interest payments shown by the blue bar have been declining as we repay debt, our spending on hospitals and schools and assistance to families with children have been increasing. Our debt has come down, we are cutting our interest payments and our investment into hospitals and schools and particularly in this Budget into families is increasing.

Our reform of the indirect tax base has also delivered very significant benefits to State Governments. In fact the announcement I made on Budget night included increased receipts of GST. Not one dollar of which goes to the Commonwealth. All of the upside gain in relation to revenue is captured by the States. You never really hear the State Treasurers talking about the benefits that the GST has brought them. But every month their cheque rolls in. Every single one of them will be in front in 2004-05 of where they would have been if the old system of Financial Assistance Grants had continued. The Victorian Government - $237 million in front of where they would have been. And you can see $237 million, yes, that is right, half the cost of the Scoresby Freeway someone down here has said, in front in 2004-05, and some States like Queensland, even more significant winners.

So in this Budget we had the opportunity to invest further in families and I want to show the way in which we have done this. This is not a package that was just pulled out on Budget night. This is something that we have been working at since we came to Office in 1996. When we came to Office in 1996 you can see that family assistance was a little over $500. And in my first Budget we increased that by $200, that is the red bar in 1997. When we introduced the New Tax System in 2000 we increased it again, and that is the grey bar in 2000. And in this bar we increased it again by $600 per child per annum, raising the minimum payment from $1,095 to $1,695. Let me say that again, an increase of $600 per child per annum. And the reason we did that is we believe that families need assistance.

We believe that there are a lot of costs to raising a family – housing, food, shelter, clothing, schooling, childcare - and delivering money back into the hands of people will help them with that cost. We do it for another reason, of the 2.2 million Australian families that will receive Family Assistance, nearly half, nearly one million of them don’t pay any tax. You can’t cut their tax if they don’t pay any tax. And so if you want to deliver to those families you have to actually do it on the payment side of the Budget. The other thing is, it is quite redistributional because it is $600 for each family. If it were done in the way of a tax cut of course then those on higher marginal rates would receive more than those on lower marginal rates – direct family assistance.

And for a single income family with around two children, what this means is in terms of the net transfers they receive, they are not paying in net terms tax until they are up near $40,000 per annum. That is, all tax that they would have been paid is being rebated by the Family Tax Benefit Part A and more, and more. And we took the opportunity to also improve incentives and to deal with marginal tax rates, effective marginal tax rates, which is the interplay between both the tax rate and the welfare system or the Family Assistance System I should say.

Let me come to this feature of what we did last night. The Family Tax Benefit is an additional benefit paid where the second income earner has a low income or no income, the single income family gets an additional Family Tax Benefit. And what’s happened in the past is, if a mother has decided to go back into the workforce, that benefit, which is for the single income family has tapered out very quickly. It is the blue line. Once you earn more than about $1800, she started losing it at the rate of 30 cents, and if she earnt a little under $12,000 that family lost that benefit. And the big structural change that we made last night in relation to that is to take away the disincentive for mothers who want to go back into the workforce on a part-time basis, allowing them to keep that Family Tax Benefit and not having that as a disincentive.

The average number of hours per week worked by a married woman on a part-time basis is 17.4, it is a little over 2 days a week, 2 - 2 ½. And by altering the structure of this benefit, women who want to come back into the workforce, mostly working part-time when they do, do not have the disincentive. And they can keep the Family Tax Benefit that they had before they started earning income.

So, we have a maternity payment which covers families for the loss of income as Mum comes out of the workforce - we have changes to the Family Tax Benefit which covers family as Mum comes back part-time into the workforce - and we have a $600 per child per annum increase in family assistance.

This is re-casting family assistance, helping families struggling with the juggling of work and family, backed up by increased outside school hours places and family day care places to allow the participation of women in the workforce as they are coming out, as they are coming back and as they bring the skills to bear in bringing their skills back into the workforce and growing our economy.

The consequence of these changes is also that effective marginal tax rates are reduced. I won’t go through them, but since 1999 reducing the income tax rate to a standard 30 cents, reducing the taper rate has brought for these groups of families, effective marginal tax rates are down very significantly.

I want to come to the second part of what we announced last night. The second part of what we announced last night was new tax scales. And in particular what we are aiming at is getting the majority of Australians, 80 per cent or more, that at least 80 per cent on a top income tax rate of 30 per cent or less. And the way in which we propose to do that is to move the upper income band to the 30 per cent rate from its current 52 cent level for $63,000 and to move the current threshold or the top marginal rate from $62,500 to $80,000.

Why do we want to do that? Well, I don’t think if you are earning $50,000 or $60,000 you are rich, I think you are a middle income earner in Australia today. I don’t think you should be on the top marginal tax rate. There will be a lot of policemen and firemen, there will be a lot of people that are looking for promotions or doing overtime that are in that bracket, and they should not be facing the top marginal tax rate. That is the first reason.

The second reason is by international standards, by international standards our top marginal tax rate cut in at a low threshold, too low a threshold, and that had to be dealt with.

And the third reason is this, moving those thresholds was unfinished business. Moving those thresholds was unfinished business, because when we laid down our tax plan in 2000 it was tax relief across the board. By the time it came out of the Senate, because of Labor Party opposition, those middle income earners were denied the value of their income tax cuts. The changes which we proposed for lower and middle income earners were in fact enacted. Before 2000, people earning up to $50,000 were on a 43 cent rate, we dropped it to $30,000. People earning up to $20,000 were on a 20 per cent rate, we dropped it to $17,000. But the Senate in the year 2000, with Labor Opposition, would not pass the remainder of our tax plan - it was defeated. And those people at the middle income levels were never able to receive the benefit of our planned overhaul of income taxes. So, this is unfinished business.

And when we say, and I would direct you to it, as we say in our book, ‘More Help For Families’ which was released last night on page 7 - the consequence of making these changes now is not that you are giving unfair tax relief to middle income earners, but you are delivering the fairness back which they should have had earlier. And we say there on page 7, that tax payers earning $20,000 have had a 23 per cent reduction in tax since 2000. Tax payers earning up to $50,000 have had a 21 per cent reduction, that is the part that did go through the Senate. But only after these changes take place on 1 July will those up to $90,000 receive their share which is 18 per cent. Still less this has been delivered for those on the lower incomes. Still less in percentage terms, but accomplishing the unfinished business of 2000. Enhancing incentives, getting back some international competitiveness and delivering a tax cut of the order of $22 or $42 or $42.21 for those on the $80,000 bracket. And there it is in distributional terms.

The blue is what we achieved in the year 2000, the red is what happened last year, the grey (if I am not colour blind) is what will happen as from 1 July 2004 and the green is what will happen from 1 July 2005. Competitiveness, incentives, unfinished business, structural tax reform. So we have families, we have structural tax reform.

I only want to say two additional things, if I may. The first, superannuation. I don’t think there has been enough attention in relation to this so far but this is available to all income earners up to $58,000. You have seen the ads on the television with the piggy bank, dollar for dollar, well that just changed. It is $1.50 per dollar for the lower income earner. And if you are below $28,000 and you put in $1,000, you will get $1,500 from the Government - $2,500 into your superannuation. Now if you put in $100, you will get $150, $250. And these benefits which shade out according to the lines which you can see on those graphs, apply as far up the income scale as $58,000. But I make this point and I make it very, very sincerely to the Senate - that is for the low income earner. A geared contribution of 150 per cent and it is backed up by another measure that runs in tandem with it, which is the reduction in the superannuation surcharge for the higher income earner. A reduction which we would like to bring down from the current level of 14 ½ per cent to 7 ½ per cent.

Now in all of the discussion from the Labor Party to date, and I listen to them carefully. I reckon I know more about their policy than they know about their policy. We have seen tentative signs that they will be passing our tax package, but I call on them to pass our superannuation measures too, no more mucking around.

And I say this to the Labor Party, the legislation for families is in the Parliament. The $600 payment can be made before 30 June. The tax cuts will be introduced tomorrow. They need to be passed as a matter of urgency so employers can have the tables to know what to deduct on 1 July. These changes need to be legislated. Let’s not keep the people of Australia waiting. Let’s not try and muck it around, interfere or re-draw.

This is a balanced package, it is a package which puts together in a strong economy better incentives for families, more assistance for families, structural reform of our income tax system, retirement savings incentives for those of lower incomes and a reduction of surcharge rates for those on higher incomes.

This is a Budget which puts together reform and can take our country forward. We need to get on and we need to enact it. We need to deliver to the people of Australia. That is what this Budget does, for families, for those who are earning, for those who need aged care and for those who need security in retirement. Thank you very much.

BELINDA GOLDSMITH:

Treasurer, Belinda Goldsmith from Reuters. In the Budget you forecast 9 per cent growth in non-rural commodity exports for 2004-05, they have stressed the importance of economic growth and demand from China. How great an impact do you think there will be for Australia if China, as increasingly speculated, is overheating and heading for a hard economic landing?

TREASURER:

Well, I think China’s growth and China’s emergence will be one of the key economic developments for the world and it will be one of the key economic developments for Australia. Australia should look to harness itself to the growth of the Chinese economy. This is the most exciting development in our region of our time. The emergence of a country of one billion people from the shackles of socialism which will give them a quantum leap in production and which will power East Asia and if we hook ourselves into it, us as well.

What China is going to need as it comes through this period, is it is going to need energy and lots of it. This is a wonderful opportunity for Australia with our gas reserves up on the North West Shelf. And we have just signed the largest export contract in Australia’s history for LNG, a twenty year contract. There will be demand and lots of it for iron ore and coal and nickel. And from our point of view, hooking ourselves to the emergence of the Chinese growth engine is crucial to our economic future.

Now you said that some people worry that China’s growth might falter. And you look at an economy like that growing at 11-12 per cent per annum, emerging through industrialisation, and you ask yourself, how long can that continue? And I think that there will be bumps and falls along the way. Yes I do. But I have no doubt that notwithstanding those bumps and those falls along the way, over the period of years, as you take a command economy and you move it towards a market economy, the growth potential is enormous.

You may have some setbacks, it will take a lot of work on their financial system in particular but although you will have spurts and falls, and spurts and falls, let me tell you, the Chinese growth projections are going to be going one way. And that is a way which Australia can really benefit from.

FERGUS MCGUIRE:

Treasurer, the Budget pushes back the receipt of proceeds from Telstra for another year. You said this week that if the sale goes ahead you would like to use the proceeds either to retire debt or buy an equivalent asset. Could you explain what you mean by an equivalent asset and does it include some of the national infrastructure projects that your National Party colleagues want?

TREASURER:

Well, look, my view is that the position of Telstra has to be resolved. Telstra is not a basic phone service company anymore. Telstra is an internet company, it is into pay TV, it is investing in Hong Kong, sometimes not with great return. It is buying software companies. The Government shouldn’t be owning a corporation that is backing itself into Hong Kong deals and software development, and cable TV. Telstra, we are led to believe, may have even looked at buying a newspaper company, we are led to believe. Should that be in Government ownership or control? I think like most of the other developed…

Ooh I am sorry, Telstra is the sponsor today…I took back…I just realised. Just edit that bit about Hong Kong out will you?

Gee they’ve got to wonder if they got value for their sponsorship dollar today aren’t they?

We need to resolve its status one way or the other. And I think, like most of the other countries in the developed world, it should be resolved in making it a private company. It be resolved by re-nationalising it. And I don’t know if the Labor Party will go down that track. But I don’t think it can stay where it is. Now, the only point I would make about when you sell off capital assets, you shouldn’t dissipate the proceeds. If you sell off the family silver and you spend it on champagne, at the end of the day, you have got no family silver and you can’t pay next weeks champagne bill.

And that is why we have used the proceeds to retire debt, because you have got a capital asset, less debt for the sale of a capital asset, now there may be other capital assets that the country could look at.

Let me give you one example of one thing we did in this Budget. We actually paid off the Commonwealth’s ongoing superannuation liabilities to Telstra. We actually made a capital sum to the Telstra Superannuation Scheme which means that we won’t have to continue to pay out the superannuation liabilities of people who worked for Telstra when it was a Government Corporation. That is extinguishing an ongoing liability and that is the kind of thing that I had in mind.

CHRISTA HUGHES:

Treasurer, Christa Hughes, Australian Associated Press. You said that the tax cuts that you announced yesterday were unfinished business. But it is now the third time in five years that you have tinkered with the thresholds. Why not take the opportunity to do something more substantial with personal tax reform like scrapping the top tax rate, raising the tax free threshold or introducing indexation?

TREASURER:

Well, I have been unable to get an increase in the threshold up to $80,000 through the Senate. What possible chance would you have of getting through the scrapping of the rate altogether? You know, having an unlimited threshold? You know, there are some people that think I just set the thresholds. You know, it is important to remember this, taxes are imposed by law. Law has to pass the House of Representatives and the Senate. The Senate is controlled by the Labor Party and left wing parties and mixed independents. And if you can’t get an increase of that top rate up to a threshold of $80,000 what chance, what possible remote chance, do you think you would have to abolish it altogether? You know, we have got to deal in the real world. And we have been fighting for this one for the last four years. Last year we slipped through an increase in the threshold, we got it through. This year, we might get this through. But we must deal in realities, we must look at potential outcomes here.

MATT WADE:

Treasurer, Matt Wade from the Sydney Morning Herald. You have flagged last year your intention in future Budgets to deliver tax relief if possible. Would you hope to do anything with the tax scales maybe further down the, tax scales than what you did yesterday, if the Budget allows it and assuming you’re Treasurer?

TREASURER:

Well, oh, it is a very, it is very, very frustrating Matt. You know, you, the tax changes that I announced last night are not yet 24 hours old and you want to know what is going to happen next year. Can’t we just savour the 24 hour period before we move on? You know, if you are eating a meat pie don’t think about the custard tart which is following, just get through that meat pie Matt while you can. That is my message and you know, the principle that I have laid down is, if you can look after your defence and your security, if you can adequately fund your health and education, if you can balance your Budget, and you have a reasonable buffer, then you should work at reducing your tax. That is what happened last year, I said to you last year, if we had the opportunity to do more we would. We did. We have. But please Matt don’t get me, don’t get, you are a hard bunch to please, that is all I can say.

JOSH GORDON:

Josh Gordon from The Age, Treasurer. You said in your speech I think that the Budget is quite redistributional towards families. I am just wondering which group it is that you are going to be taking money away from to undertake that redistribution?

TREASURER:

Well, as I said, a large part of the family package has been paid for by company tax collections. That has been the big driver, a revision up of $1.8 billion since Mid-Year Review. Now we could have put that to repayment of debt but you have seen my slides, I will just put the debt slide up, if I can do it, if we can do it, no, no, no, no, right, that. We could have re-paid that debt further, but as you can see, in comparative terms it is pretty low and so we re-distributed that to Australian families, that is what I am talking about, that is the re-distribution that has gone on.

Now, can I say to Australia’s corporates, they say, oh well, you are re-distributing company tax to families, yes we are and I think that is good policy. Is it because we have asked higher taxes out of Australian corporates? No, we haven’t. In fact we reduced the company tax rate from 36 to 30 per cent - a lower rate.

And, let me remind Australia’s corporates, we introduced full dividend imputation, that is the refunding to people who are on a lower tax rate than that of the franked amount. The reason that those collections were higher is that companies are profitable.

This is my whole point about economic management, you get into a virtuous circle, if you get your economic management right and your companies become profitable and, without having higher rates, that delivers higher tax, then you can help families. But if you don’t get into that virtuous circle you get into that unvirtuous circle. Bad economic management leads to less people in work and less company profitability, leads to less revenues. You have got nothing. This is the whole point. You are going the other way around.

And there are a lot of Australians who are entitled to say, well, if economic management has been strong and if our economy is strong, then where are, where do ordinary people feel that? Well they feel that in my view, with family help, with a better tax structure, with retirement incomes incentives, more investment in hospitals, more investments in schools, help for our carers and more aged care places. But it starts from economic management.

Now, the challenges will keep on coming. Anybody who thinks…if anybody thinks this, that Australia is out of the woods, if we returned to this thinking that it will all be OK mate, we don’t have to do anything else then, that is the very time where we will come undone. We have to remain on our guard.

NIGEL BLUNDEN:

Mr Costello, Nigel Blunden from Channel 9. In the wake of your ninth Budget last night the Prime Minister this morning was quite glowing in his praise of your work as Treasurer. He then, however went onto say that he does find his job immensely stimulating and feels that he still has got a lot to give. I was just wondering of you, how do you rate John Howard’s performance over the last couple of years? Also, how much more do you feel he has got to give to the job of Prime Minister? Should he perhaps, as you are encouraging some other Australians, work until he drops?

TREASURER:

You know Nigel, I know you are in the Nine Bureau, I spoke to Laurie Oakes last night and he said he thinks he has got a lot more to give. As head of the bureau, he feels intensely stimulated, but I think there is still a place for you down there somewhere.

ALESSANDRA FABRO:

Alessandra Fabro, Fin Review. Treasurer, the tax cuts next year are going to cost $1.9 billion, but in the same year the personal tax take is going up $5 billion, so can you tell us exactly how much you are expecting to get from bracket creep over the next four years, and why weren’t the cuts larger?

TREASURER:

Well, you know, I plead you have got me both ways. You know, the income tax cuts are too generous to upper and middle income earners or if they are not, they are not generous enough. This was a line that was being run on certain media outlets last night, I think they are right. I think this is a competitive package and it will clear the Senate, but what we are also doing is distributing to families. But we are distributing more to families than we are distributing in income tax cuts, $19 billion to families, $14 billion in income tax cuts. Now, if you had done all of that in income tax cuts, 1 million Australian families who pay no income tax, would receive nothing, would receive nothing. As I have already said, there are families with two children that don’t pay tax up to $40,000. So, we could have taken it and said, let’s do income tax cuts, and people up the higher scale may have received larger cuts, and 1 million Australian families would not have received anything. These are choices. Some people will say that you should have distributed more to families and less in income tax cuts, some will say as you have said, more in income tax cuts and less to families. The balance is this, 19 to 14, families first, families square, families centre. That is the way we decided to do it.

ANDREW FRASER:

Andrew Fraser, The Canberra Times. Your colleague Gary Humphries is proclaiming today 1,000 new public sector jobs in Canberra from this Budget. What trust can we place in that promise given that your administration axed 17,000 public sector jobs in its first term?

TREASURER:

Well, I think I am right in saying this, and I will be corrected if I am wrong, and I did see an article in The Financial Review, I think saying that under this Government public service jobs had increased and were nearly back to 1996 levels, I think that was the story. And I think that is probably right. But let me tell you this, if after eight years of government, with 1.3 million jobs in Australia, if the level of the public service is where it was eight years ago, that would indicate to me a pretty lean administration, it really would. Because there had been 1.3 million new jobs in Australia and what they are saying is no net increase in the Commonwealth Public Service. Now, I actually thought, I don’t think it was written to be a complementary article but I actually thought when I read it that that was not actually an uncomplementary article.

Now, I think you are coming from another angle, you are saying there should be more public servants, I think. I think you are saying that we have cut too many, but I don’t think that is right. I think Canberra actually survived the cuts in the public service and I think it was the best thing that ever happened to it. It developed a vibrant private sector as a consequence. We are now in a situation where there are more people that are in the private sector in Canberra than are in the public sector, it is no longer a majority government town and far from Canberra suffering, the unemployment rate in Canberra, I think is now the lowest of any capital city in Australia. So, look around you; Canberra is alive, lean but alive.

11 May 2004

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