PRIME MINISTER
TRANSCRIPT OF THE PRIME MINISTER, THE HON P. J. KEATING MP
SPEECH AT LUNCH HOSTED BY THE AUSTRALIAN INSTITUTE OF
MANAGEMENT, PERTH, MONDAY, 15 MAY 1995
E& OE PROOF COPY
I very much welcome the opportunity to talk to you as most of you are
members of the Institute and to talk about the economy and the growth
prospects we find ourselves with and the, Budget. Because, this is an
important Budget, they are all important but, I think, this is particularly
important given the fact that we have succeeded in engendering quite a lot of
growth back into the Australian economy and the aim of the game is now to
keep it going at a sustainable rate, with low inflation and so that we can reach
our target which we have set for ourselves of five per cent unemployment by
the year 2000.
That means a lot of investment and a lot of investment means a call on
savings. Part of our problem has been, for many years now, that because in
the 1970s the increase in wages and costs, the broken profits of the period
and the big call by the public sector right through the 1970s dislocated
Australian private investment. We ended up for a decade, with a very low
level of investment and so that hole in the capital stock meant that we have
never ever got beyond the period since where we can grow at more than
about four and a half per cent without the demand spilling into imports. We
can get the economy up and running and it is really quite fast for a western
style economy such as Australia to grow at four and half to five per cent. But
after that, we get a spill into imports, and that is because there is not enough
plant and equipment, not enough strength in the capital stock for us to be
able to grow at five and six per cent and yet satisfy the production here in
Australia. So, the aim of the game from here on is to add to that capital stock. Now, we
have got a big boom in investment in the late 1980s, in the second half of the
1980s, but not all of it went into plant and equipment. Quite a lot of it went
into central business district towers, office towers and other things which
have been sub-economic and it is only now that they are starting to fill up and
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starting to produce a rate of return. In other words, we carried a big call on
our savings for not a commensurate increase in our productive capacity.
Now, this time it is different. You will notice that plant and equipment
investment in the last year was running at around 26 per cent. In the last
Budget we put the forecast in at 14 per cent. All the pundits said ' oh, too
optimistic, Budget built on all this optimism'. It turned out the rate of growth in
plant and equipment was about twice what we estimated and the economy
grew by even more than the Treasury had estimated. So, we are now seeing
a very large investment phase, but this time it is going to be adding materially
to our productive capacity where as the late 1980s cycle didn't so do.
The aim of the game now is to keep it all going and to keep that additional
capacity coming into our capital stock so as to bring unemployment down to
five per cent. This is a particularly important economic and social objective
because Australia has, I think, one of the opportunities, let me say it has
been one of the few countries in the world, where we have a quite fully
employed society and where we are more cohesive as a society, where our
values are as intact as they can be, that is our egalitarian values, and that we
move along as a society together. That the policies of inclusion matter and
that we regard it as a matter of national importance and national policy that
we have as many people getting a right to a job as possible. These were the
tenets we put together in One Nation in 1992, but indeed they have been the
policies we have followed since 1983. That is, there has always been a
premium on growth and on employment.
This is not true of many countries. In western Europe, employment is the
number that falls out the bottom of the system, it is a residual. And, the
growth is also a number that happens to fall out the bottom of the system.
Government's don't target growth. If you look at the West Australian
economy it is growing even more rapidly than the national economy and that
is because the whole of national economic policy is focussed towards growth
and the states that have had the tariff monkey lifted from their back, that is
Western Australia and Queensland are growing even faster than the national
economy. I was in Lower Saxony, Germany, about a month ago, this was where we had
the CeBIT fair and Australia was the guest country at the largest technology,
electronics fair in the world, and the Premier of Lower Saxony, Premier
Schroeder, met me and he was saying, we were having a talk about his
economy. He said ' look, we have got tremendous community spirit in Lower
Saxony. Everybody puts their shoulder to the wheel, it is a community effort.'
He said ' we are facing big problems because the main industry of the State is
Volkswagon at Wolfsburg and because of the continuing productivity of the
motor industry we are getting more output for fewer people. So, we have all
decided to work a four day week, the whole of the State is working a four day
week.' I said to him ' but, why don't they pick up other jobs, I know you
employment growth isn't what ours is, but isn't there enough?' He said ' well,
we have only got, basically, three quarters of one per cent employment
growth'. Now, in the last year in Australia we have had 4.2 per cent
employment growth. We have had four to five times as much and that is why
we have actually got a chance now. We have seen unemployment come
down from 10.5 per cent to just over 8 per cent last week and we are
forecasting 8 this year, but we want to get to five per cent by the year 2000.
That will mean that this country is stronger, socially it will be much stronger
and, of course, there will be much greater levels of wealth. But you all know
in this room, that employment comes from investment and investment comes
from a set of variable which include profits, return on capital, the level of the
inflation rate, the competitiveness of the exchange rate, it comes from all
these things and it comes from national savings. The central point of last
Tuesday's night Budget was to improve and augment national savings.
When I first started speaking to you I talked about that 1970s problem of a
dislocation of private investment. What happened in the 1970s is the public
sector spending at the Commonwealth level went out from 23 per cent to
about 27 per cent under the Whitlam government and they went from 27 per
cent to 30 per cent under Malcolm Fraser and John Howard. When I became
Treasurer in 1983 Commonwealth Government spending was 30.5 per cent
of GDP and the year I resigned the Treasury it was at 23.5 per cent. It was
down 7 percentage points of GDP which in today's dollars is about $ 30-35
billion a year.
But, that big call in the 1 970s meant that it, essentially, suffocated the
capacity of Australian business to borrow and to invest. Now, you know, that
one of our principal problems now is that we are running a current account
deficit, on average, of around 4.5 per cent of GDP. At the moment it is
running around 5.5 per cent, but it averages around 4.5 per cent in the 1980s
and early 1990s. In the 1960s and 1970s it averaged around 2.5 per cent,
but then we had no debt. We had no debt because every year we had
private capital investment equal to about 2.5 per cent of GDP. In a country
this big there is always something going on whether it is ports, wharfs,
railways, mines or whatever it might be, manufacturing industry, and there is
always a level of private equity investment. That generally equalled our
current account deficit so, we could go on running a current account of about
per cent of GDP, but not build up any debt. What has built the debt up for
Australia is that extra two percentage points of GDP which is $ 10 billion a
year in today's dollars. GDP is about $ 500 billion, 2 per cent of it, is as I said
earlier, around $ 10 billion.
The problem and the challenge for us is to put in a savings change to meet
that two per cent and this is what we did last Tuesday night and in the doing
of it, making higher rates of investment in the future sustainable, higher rates
of growth sustainable and higher rates of employment sustainable. You
remember Ralph Willis saying that we went from a deficit of 2.8 per cent of
GDP to a Budget surplus of $ 700 million. The shift overall is around, if we
look in the next year or two out, the shift is around about four per cent of
GDP. In other words, we are in surplus this year, next year we are in even
larger surplus, the year after that we are running a surplus of $ 7 billion. So
basically, we have got a change there of about four percentage points of
GDP and I will just do this little bit of arithmetic with you because there are a
lot of numbers in this, but it is quite easy to follow. The savings problem is
two per cent points in size. So, we have got to get a two percentage points
fix into the system. We have got, essentially from the Budget, a four
percentage point change and then the other great change in the Budget was
to build on the reforms we had introduced in earlier years to award or national
superannuation. This, I think, we can genuinely say is the most
comprehensive savings change or plan the country has ever had.
You know that the Government, in 1985-86 under the Accord Mark V, we
introduced there three percentage points of savings by the workforce, of
income put away as savings in superannuation or as we called it ' award
superannuation'. That was moving up towards five per cent when we
introduced the superannuation guarantee charge or the SGC as it is known.
That takes contributions by employers on behalf of employees under the
wage arrangements, up to nine per cent of wages and salaries by the year
2002. But, I think, most of you in this room would know, to get a mature
contribution to superannuation, something that adds a very substantial long
term benefit to retirement incomes, you need to be around about 15 per cent
of a wage and salary.
In the Budget we did two things. We said that we will be supporting the
inclusion and awards of three per cent of employee contributions and we will
pay the second round of the One Nation tax cuts into the same
superannuation accounts. So, in other words, as a result of last Tuesday
night's budgetary change, there will be a further six percentage points of
wages on top of the nine which exists under the Superannuation Guarantee
Charge. Put the two together and you have got fifteen. So, by the year 2002
everyone in the country will be putting 15 per cent of their wages and salaries
away. This is going to produce an enormous shift in savings. When John
Dawkins and I were sworn in as Ministers in 1983 we had $ 40 billion in
superannuation funds. This year we have got $ 186 billion and by the year
2020 the Treasury estimates we will have $ 2000 billion. We will have $ 2
trillion in superannuation funds by 2020.
Our national debt at the moment is $ 160 billion. Already we have a greater
level of savings in superannuation at $ 186 billion, greater now than our
national debt, but that will grow. This will do a number of things about
retirement incomes. Let's take someone on average weekly earnings now on
$ 33,000, at the end of their working lives, they will build in today's dollars a
lump sum of $ 470,000 and they will have an ongoing annuity in retirement of
$ 30,000 a year. So, they are on $ 33,000 a year now, in 1995-96 dollars, they
will have $ 470,000 as a lump which payed out as an annuity ends up at
$ 30,000 a year. Someone on twice average weekly earnings, around
$ 60,000, will end up with a lump of $ 670,000 and an ongoing annuity
payment of $ 52,000 a year.
So, this is a great change to retirement incomes and to savings. When my
generation, the baby boom generation, is 65 there will be half as many retired
aged people as there is today and 10 years after that or 15 years after that
there will be twice as many retired age people as there is today. The problem
will then be; how does the cohort at work carry this huge group of people, this
aged group in retirement at that point without an erosion of the basic pension
or a massive change to taxation levels? Well, there is only one way start
now to put a scheme together. We started in 1985-86 and what you are
seeing on Tuesday night, in a sense, is the culmination of those changes with
another six percentage points added. This is not simply a great change in
social policy, but it is also a great change in savings.
Let me go back to the calculation, the two percent again. Remember I said
the current account is two percentage points of GDP, larger than we can
afford it to be. We have put a four percentage point change in on the Budget,
but that savings pool from superannuation is going to be worth four
percentage points of GDP by 2020. So, by 2020 we have got an eight
percentage point change in four in the Budget, four on superannuation but
the problem is more immediate than 2020. So, let's say, look at it in the year
2000, which is what we in this room are immediately interested in. Where is
the current account going to go in the year 2000, five years from now. In five
years from now those superannuation changes will be worth two percentage
points of GDP, the Budget will be worth four. But by then, some of that four is
cyclical, some of it is structural. If the cycle changes at any time and the
cyclical part starts to turn down, let's say ' let's put a discount into that and call
it two to three per cent'. Two to three per cent on the Budget and two on
superannuation. That comes to four to five per cent and that is what we did
last Tuesday night. We put a four to five per cent of GDP savings change in
for a two percentage point current account problem.
That is why the Budget is so central to the maintenance of this recovery
because the recovery can only be built on investment and we can't have the
investment without the savings otherwise it will spill over into overseas
savings, into overseas borrowings, into overseas debt.
So, the Budget in that sense, was a great change and one that is designed
to, you remember in the latter part of last year we had three quick interest
rate adjustments and that slowed the economy off from the growth rate of
then 6.5 per cent which was unsustainable back to something around four per
cent which is what we have now. In other words, we don't need this Budget
to restrain domestic demand. What we need this Budget for is for a medium
term change in savings because we have got the slowing from the monetary
adjustments. As a consequence, last year we sold $ 21,000 million worth of
commonwealth bonds. The bond selling program was $ 21 billion. As a result
of the Budget changes, the bond selling program this year will be $ 6 billion.
So, there is a $ 15 billion reduction this year over last year in the bond selling
program. You know you don't have to be an econometrician or a financial
market person to know that if you take $ 15,000 million of demand off the
Australian savings pool, there is going to be a lot less paper around than
there was therefore if there is less of it, the price of it rises and if the price
goes up with the bond the yield comes down. The yield, of course, is the
interest rate.
So, as a consequence of the Budget, the bond market fell by one percentage
point. From just over 10 to just over nine for 10 year bonds in the last week
or so and that is the cue, I think, that some of the other people the banks
and others have taken in the financial markets. In other words, by getting
the Budget back into surplus quickly and decisively, we have taken an
inordinate pressure off the financial markets which is reflecting itself in that
shift in bond yields. In other words, what the Government is after is
sustainability. We have had three years of growth since the recession. The
Treasury in Statement Two is forecasting sustainable growth for three years,
for three years out. In other words, if we take three years from now we are
talking about 1998, if we look from 1983 to 1998 we will have had growth
right through the period bar for 18 months which was in 1991-92, in the
recession. It is going to be a very long period of growth, but after the
recession, of course, low inflationary sustainable growth and not pushed
along by a bubble of bank lending and indiscriminate lending of the kind we
saw in the later 1980s, now a far more abstemious financial sector with low
inflation, secure profits, a much more flexible labour market with enterprise
bargaining; in short a much more sustainable level of growth into the future.
That is what the Budget was about, but it was not just about that change in
the balance, but as I said, that huge change in savings coming of
superannuation. Now, I have got John Howard running around the country
talking about chicken little, the sky is falling in, we have had five minutes of
sunshine, la de da de da. But, the truth of the matter is we have already had
three and a half years of growth and the Treasury is saying we will have
sustainable growth around these levels through the forecast period and the
forecast period is 1995 to 1998. So, after the recession, we have had three
and a half years of growth and we are heading for six. We had 90,000 job
growth last month. We have had the largest fall in unemployment in the last
year since we have been keeping the records. The Government's principle
commitment in the election was to reduce unemployment. We said we would
aim for a target of 500,000 in three years. Well, in two and a quarter years,
we are already at 650,000. We got to the half a million mark in two thirds of
the time that we thought and not only that, we are now reaching into the long
term unemployed because 100,000 of them have gone back into the labour
market or where in any such period in the 1980s maybe only 10,000 would
have gone back into the labour market because what happens, when the
labour market picks up the school leavers the new entrants to the workforce
go into jobs, those who are longer term unemployed generally get left behind.
But, Working Nation, that statement I introduced on behalf of the Government
last year, the case management and labour market programs is now getting
into the long term unemployed, getting them trained and giving them a job
subsidy and getting them back permanently into the labour market.
This is going to mean, where in the 1980s with all that growth we got
unemployment down to about 6.5 per cent, but we couldn't get any lower no
matter how hard we pushed with employment, we couldn't get any lower
because we couldn't train the people. Working Nation is actually going into
that body of long term unemployed people and training them and getting them
back out so that means that the five per cent unemployment target becomes a
real possibility for us.
In western world terms, there are very few countries with that prospect facing
them. That is, to be able to say we would be able to keep up higher rates in
investment and higher rates in employment. Because if we need to fill that
capital stock I first mentioned we would need even greater levels of
investment than we have today. It is not just today's investment levels, but
something greater than today's. That is going to call on savings and that is
why we needed the Budget change and the superannuation change together
because if we are to relieve that pressure on the current account, we are not
just simply relieving it in a static scenario. We are relieving it, but as we
relieve it we will then build up greater demands for investment because the
confidence effects will be greater, the needs for employment will be just as
great and so as we get more successful success breeds success and so
we will have even more investment. We have got to be able to pay for that in
savings too. So, we needed a big change, a really big change in Tuesday's
night Budget and that is what we gave you a large change on the Budget
balance and a large change in superannuation.
All of this, I think, means that as we move down towards the year 2000 we are
going to be able to see a further great change to the nature of Australia. This
is the first time in our history where we have been located at the foot of the
fastest growing markets in the world. Normally, for us, traditionally for us,
those markets have been in Europe or North America. They are now here at
our doorstep in the Asia-Pacific and to have that great opportunity we have
got to be stripped down, competitive and be in a position to go and get after
it. But you can't get after it without investment and you can't get after it
without investment if you are relying on the rest of the world for savings.
Can I just say there is a lot of gloomy stuff around about savings and you can
see how the Government is taking it seriously, but we are taking it
constructively. We are not out there with slogans and with incantations. We
are in there with some serious policy. But, I think, you need to remember we
have got $ 160 billion of off-shore debt, but in the period since the
Government removed exchange controls in 1983; you see before 1983 you
couldn't invest off-shore, the Reserve Bank wouldn't give you the tick under
the managed system to invest off shore. But in the period since 1983 to now,
we have now got $ 135 billion of off shore assets. So, we have got $ 160
billion of net debt, but we have got $ 135 billion of off shore assets. So, you
look at all these big companies like BHP and Boral and Brambles and the
TNTs of this world, they have all invested in North America, in Europe, in the
Asia-Pacific, and as a consequence we have now got a very large stock of
investments off-shore.
So, all these things have taken in the minds of the financial markets when the
assess Australia. They don't just look at our current account debt, they look
at our assets off shore, but they more importantly, look and see what we are
doing in the longer run about savings. They say ' is this a serious country?
Yes, it has broken the back of inflation, but it got itself into a whole in the
1970s. Has it got itself out of it? Has it done the things to add to savings and
keep its competitiveness up.' Now, I think, after Tuesday night the answer to
that is a resounding yes. But, it wasn't just Tuesday night. It was also the
1993 Budget which John ( Dawkins) presided over as Treasurer and took a lot
of stick for in getting fiscal policy back into shape at that time and it was the
Budget's in the 1980s where we pulled, as I said, outlays down from 30.5 per
cent of GDP to 23.5 per cent.
Tuesday night was a big change in Australian public policy for the
maintenance of a long-run, low inflationary, high investment recovery. So,
when Richard Court tells you it is happening because the buses are running
on time or it is happening because he has got some project starting, all that
helps but it is principally happening because of the national government's
policies. It is principally happening because of the change in
competitiveness coming off the exchange rate, wages and productivity and
we are just signing up another Accord with the ACTU which will maintain
moderate wages growth into the future and protect that inflation rate. It is
worth remembering that Australia, today, is 40 per cent more competitive than
1983. Not 4 per cent or 14 per cent, 40 per cent. That is why Western
Australia is growing so strongly. It is coming off the big wage adjustments of
the 1980s which turn that big nominal depreciation of the exchange rate into
a real depreciation. I like the States we are doing quite a lot with the States
now at COAG, you can see it with the Hilmer changes I like the States to do
well. Victoria is starting to go ok and there has been some sensible things
done in fiscal policy there.
But a Lloyd Webber show and Grand Prix is not going to remake the Victorian
economy any more than making the buses run on time or ticking off real
estate developments is going to change things here. What is going to
change things is the big pulse of national public policy. The only thing that
ever changes anything and when you look at the Government, people say
' well, you have been in office 12 years, don't you think it is time for a
change?' I say ' what other government would be putting a savings change of
this quality and this dimension in, having this conversation with the workforce
to get people to put 15 per cent of their income away as savings, what other
government has done that? What other government has been able to break
the back of inflation and keep it there by the introduction of an enterprise
bargaining system in the labour market?' I have mentioned John a couple of
times, the last thing I did was on Friday was open another university at
Sunbury in Victoria. In 1983 only three children in ten completed secondary
school. This year it is eight in ten and we have added, as that eight in ten,
that massive through put has spilled out then into tertiary education, we have
added about 65 per cent of places to universities in a big revolutionary
change in the 1980s which John ( Dawkins) presided over.
As a consequence, we have established about 18 universities of the size of
the principal state universities to the system and we are now building, in One
Nation, the TAFE system through the Australian National Training Authority
so that vocational education sits up beside tertiary education to provide the
horse power for the product innovation Australia is going to need to
participate in this world economy and to participate to the full.
I have got John Howard chasing around yak, yak, yak, yak on radio stations
around the country. I have got Costello like a crow on a fence carking at
every, picking the eyes out of every bit of good news that comes along and
Howard saying ' well, you know, test my credibility with the Prime Minster's.' I
say ' but hang on, what are you talking about? What have you ever done?'
Does anyone know of one thing that John Howard did as Treasurer that
mattered, seriously to this economy except other than increasing the levels of
outlays to GDP? I mean, he is now trying to remake himself by denying all
the policies he was associated with in the 1980s when he was Opposition
leader. I said ' well, hang on, I have been around during this period with a
Cabinet that has international ised the Australian economy, which has
changed its competitiveness by 40 per cent, which has revolutionised the
product markets, which as knocked the tariff wall over, which has totally
changed the face of Australian education, which is now changing the culture
of Australian management. We have had 50 per cent, we have nearly
doubled exports. Exports were at 13 per cent of GDP, they are now at 22 per
cent. That is what we have been doing and we have had 26 per cent
employment growth since 1983.' When you talk about credibility, you are
talking about someone who has got another set of things on the other side of
the ledger to compare himself with. But there is this side of the ledger and
then there is that side of the ledger. There is nothing else other than a few
empty incantations. Howard has only had three policies.
One is throwing tax benefits up to top end families. The other is kicking the
life out of low wage earners below about $ 24,000 a year. I mean, what a
great objective to have in public life. Say ' well, I want to get after those
characters on $ 23,000 a year and shake the living hell out of them.' And, the
third thing is to put in a GST. They are his three policies. They have never
been any different. The same three. He had a chance on Budget night to get
up, we are within a year of an election, he had the Budget reply to get up and
say ' hang on, there is the Government, it has put down this big change in
savings, big change in the Budget balance, they have introduced Working
Nation, Creative Nation et cetera, this is what I think should the be shape and
nature of Australia.' Nothing, just a bucket of abuse, a bucket of rhetoric and
in the end nothing else.
So, I don't believe the Australian people looking at this recovery and its
quality, not just the recovery, but the low inflation high productivity nature that
it has, and the linkages this government has made in Asia with APEC or our
role in the GATT, are going to walk away and say ' well, here we are with what
has been the fastest growing western world economy with low inflation, we
will turn our back on that for John Howard, Tim Fischer, Peter Costello and
Alexander Downer that sparkling front bench of theirs that sparkling little
front bench of theirs. And now, of course, we have got Dr Nelson who has
been in the Labor party for 17 years, that is his claim to fame. The Liberal
party these days is like a business club. You join at the door. They say ' oh,
you want a safe seat in Parliament, ohh come in, come in. You want to be a
member of parliament in one of our best constituencies, just step this way.':
opportunism and brigandry, the stock and trade of a party without any guts
and without any substance.
The message I want to give to you is this that this is a very large savings
change coming from a government which has fundamentally altered the
nature of Australia to an externally orientated competitive trading economy,
but where when we let our guard down in the 1970s and let our capital stock
drop and at the same time with double digit inflation, punctured a whole in the
propensity of Australians to save, we have tried to repair the problem by the
public sector coming back strongly into surplus and making up for those
paucity in private savings by a set of savings arrangements through
superannuation which will guarantee us a lift in savings when we really need
it.
That is why, I think, the Budget was well received and why I hope you think
that it is a good document and one that will sustain the recovery into the
future. Thank you.
ends
QUESTION AND ANSWER SESSION
Q: Prime Minister, in light of the recent Karpin Report ( Enterprising
Nation), can you comment on how you rate Australian managers now?
PM: The old tariff barriers, the tariff walls produced a lot of easy profits and
when we had a less discerning securities market and stock exchange,
boards of directors could get away with over valued assets or under
valued assets and, essentially, modest profit performances. There
was not a lot of pressure for distribution of dividends, but most of the
manufacturing sector was protected by the tariff walls, its profits came
from the tariff walls. This produced a lot of sloth in the structure of
management in Australia and this has changed, of course, in the last
years or so with the tariff barriers coming down, with development
for the first time, really, of a sector of internationally traded services
which we have, and until we removed exchange controls, ever had and
that development has meant that we have developed whole new
sectors in the financial services, in education services, tourism, et
cetera which did not exist and they are internationally traded services,
so you have to be internationally competitive to be in it. The mining
industry had international competitive pressures on it because it had to
sell into an international market place against other countries, but most
of the manufacturing, of course, was protected by tariffs.
Like everything else, competition is a great thing and competition
works and much of what the government has done over 15 years, over
12 years is to introduce competition by way of imports with lower
tariffs, by way of competition generally in Australia, by now getting the
State and Commonwealth sector utilities out there and competing,
introducing competition into things like airlines and
telecommunications and what have you and by and large the
opportunities to success particularly in the turnaround of our
competitiveness and also the pressure which has come from the
recession has produced a lot of productivity changes and a great sea
change, I think, in management.
I think David Karpin was talking about not simply an improvement in
management, the capacity to manage, but also in genuine
entrepreneurship. Entrepreneurship got a bad name in the 1980s
when we had the world awash with money and people borrowing it,
buying up assets for, largely, non-productive purposes. That is not
what we have always thought that an entrepreneur was about. We
thought an entrepreneur was about building industries and building
businesses and seeing opportunities in market niches and exploiting
them. I think we are developing a class of managers and
entrepreneurs now as we are going about. I think, any commentary I
want to make is we haven't got enough of them and we need more
such people and, I think, the fact that the country is now so open and
so near particularly South-east Asia that we are seeing South-east
Asian entrepreneurs coming to Australia and our entrepreneurs going
there and this flux that this is setting up is producing a more
entrepreneurial spirit in Australia because I certainly believe we need
it. You will always need the people to make the business decisions to
make the world go round and we have tried to give business an
environment in which to do that. High profits, a competitive exchange
rate, a competitive country in all, a competitive tax system, all of these
things are important as back drops to that sort of essential
entrepreneurial activity.
So, I think, David Karpin's point is yes, it has improved a lot, but of
course, we all know it had to, but we have still got quite a way to go
and I think I endorse that too.
Q: Prime Minister, last week I saw Cheryl Kernot's comment that of the
billion worth of asset sales that were projected for this year only
million had in fact been achieved. Is that in fact correct and how
confident are you that the $ 5.5 billion projected for next year will in fact
also be achieved?
PM: I am fairly confident because we have floated some of these larger
assets off in the past. We sold a quarter of the Commonwealth Bank
in 1991, I think it was, then we sold subsequently another quarter of it
and that is by far and away the biggest of the sales and now, of
course, it is a company listed on the stock exchange and it is priced
every day and part of the arrangements that we are now making with
the Commonwealth Bank Board is that the Board's considering
purchasing some of the shares back so that it makes the digesting of
the sale even easier to the market. So, I think, that is something that is
well within our grasp. Qantas was to be in this year, we have been
improving Qantas's underlying profitability and picking the right
moment to sell it. It is not just a matter of saying ' well, we had it in for
last year'. It is a matter of whether we sell an asset, but we pick the
right moment in the market to actually sell it and, I think, we are better
off selling it this year than last and that was a judgement we made
about the middle of last year and at the same time its underlying
profitability is improving. So, I don't think there is a problem there.
They are the main ones, and of course, next year we will have some of
the airports.
So, we have had, I think, a reasonably successful period with asset
sales. If we don't sell them often it is because we take a decision to
delay them for market reasons not because we can't sell them or in
same way we have misjudged the quantities or amounts. By and
large, they are fairly conservative estimates. But, can I just say that
next year, the Budget is in surplus without the asset sales anyway.
The quality of this change here is such that free of asset sales, the
Budget will be in surplus anyway. But, as a person from Moody's
made the point on the radio last week, it doesn't matter whether the
asset sales are in or not. He said all we look for is the bottom line.
And, the reason they look to the surplus and not try to disaggregate it
is for the reason I said earlier, $ 21 billion worth of bonds we sold last
year, this year we will be selling $ 6 billion. It doesn't matter what the
source of it is, we are going to be selling $ 6 billion not $ 21 billion and
therefore the pressure off interest rates only is so much more obvious.
I think, that is what the financial markets will be looking for. The main
thing for us is that we have got the Budget comfortably back into
surplus and we reckon next year we will be running a surplus of about
$ 4.1 billion and the following year we will be running a surplus of
around $ 7 billion.
Q: Mr Keating, let's suppose Treasury gets it wrong in respect of forecast
on growth and the numbers aren't quite so big as they are forecasted
and let's say the weapon of superannuation doesn't yield the
difference of two per cent that is needed for the savings, how does
your Government plan to address next year, subject to you being in
power, of course, the balancing of the Budget once the national assets
have been sold off?
PM: I thought I answered that in the previous question. That is, next year
without the assets we will still be in surplus, but we are in surplus on
rates of growth which are far less than the ones we have had at the
moment. You see, in the year to September, when the September
quarter national accounts came out for the year to September, the
economy was growing at 6.5 per cent. We had 8.5 per cent for gross
national expenditure and 6.5 per cent for GDP. Because spending
was greater than product, it was spilling into imports and we know that
we know that we can't sustain a rate of growth around 6 1/ 2 per cent of
GDP. Well in this year we are forecasting 3 3/ 4 per cent. That is a
long way from 6 1/ 2 per cent, you see. So we have already got a very
heavy change in there. We have portended, forecasted, quite a heavy
reduction in activity as a consequence of those monetary adjustments
late last year. So, by and large, these are, at their best, only forecasts
and forecasts can be wrong. But, by and large, these ones now in a
growth phase, there is less risk to them in a growth phase and as well
as that they are quite conservative. So I don't really see that we run
any great risk of those numbers not being achieved.
At any rate, the superannuation changes are already in place. I mean
on 1 July this year, the metre ticks over to 6 per cent. So the large
companies will be paying 6 per cent in, another 1 per cent in on super
and the smaller companies then turn over at 5 per cent. From the year
1 July 1997-98, we start the 1 percentage point change on employee
contributions from superannuation and in 1998/ 99 we'll be putting in
the first 1 per cent from the tax cuts away. So you know there is going
to be a fairly big kick along to savings in all of this, even if to the
decimal point the Treasury estimates were not to be achieved because
what has happened to us in this last year is we have hugely
succeeded them.
I mean in last year's Budget debate they were saying oh, oh, oh, the
Government's got this very upbeat assessment of 14 per cent for
investment. Well as I said to you earlier, we did 26 per cent this year
and we have come out of the year greater than our growth forecasts.
So, by and large, I think we have taken the conservative side of the
estimates.
Q: Mr Keating a lot is said of us, or Australia, being part of Asia Pacific
and competing with Asia Pacific. But it seems to me that the company
tax rate is going from 33 to 36 per cent, while the company tax rates in
our competing countries in South East Asia are actually decreasing.
Could I have your comments on that please?
PM: Well, I mean, I think Singapore is around 33 per cent, where we were
last year until we put this change through. I mean that is the sort of
general level of rates in this part of the world. But most of these
countries are not running an OECD style economy, you know, with a
general quality of services we have in a continent this large.
You see one thing worth bearing in mind here is that we are now the
second lowest taxed country in the western world. We are a decimal
point higher than the United States, who are the lowest, and we are
also the second lowest spending country of the 27 member states of
the OECD. We are the second lowest by a decimal point, again,
above the United States. So we are delivering a lot of high quality
services in health, education, roads, transport for a fairly small public
sector. But a number of things have changed in the revenue equation for us.
It was for good policy reasons that we wore away the tariff wall.
But that loss of customs duty is this year costing us $ 5-6 billion and
next year will cost a full $ 6 billion and it will have an ongoing cost of
$ 6-7 billion a year, every year, because we are just not getting the duty
because the barrier doesn't exist anymore.
The company tax change from 39 per cent to 33 per cent, the two
investment allowances and the accelerated depreciation package
which I had in that statement Investing in the Nation which we
published in February 1993 is now costing the Budget $ 3 billion a
year. So if we are losing $ 6 billion a year on tariffs and $ 3 billion on
companies, that is $ 9 billion, and Bass Strait is now running down
quite dramatically, quite sharply, at those very large, formerly efficient,
performing reservoirs in the Gippsland Basin are now into a secondary
recovery. So we are losing about a billion a year, over the last five
years, out of that. So you can say with just those changes alone, we
are losing $ 10 billion a year or 2 per cent of GDP. Now it has got to
come from somewhere.
So what we decided to do was to put the company tax rate to
36 per cent, which is still well and truly competitive within the OECD.
In fact, it is on the bottom of the OECD, sort of, band of rates and still
reasonably competitive with the countries we trade with in Asia.
The other thing that I think is worth bearing in mind, is that Australia is
one of the few countries in the world which provides for dividend
imputation. We actually let private companies distribute and we give
them an imputed credit for the company tax paid. This is also now
delivering a benefit to shareholders of the order of $ 3-4 billion.
So, at the last election those great lions of business in the Liberal
Party wanted to stick the company rate up from 39 per cent to 42 per
cent. We have reduced it from 39 per cent to 33 per cent. So in the
last year they would have had a 42 per cent company rate, we had a
33 per cent company rate and we are moving it to 36 per cent. So, in
other words, we are getting from companies $ 300 million this year and
$ 1500 million next year.
In the climate of very high profits, the profit share in GDP, the
proportion of national income going to profits this year, has no historic
precedence. So if the companies can't pay another 3 percentage
points on the company rate, who can? I mean the people on wages
under $ 30,000. I mean who is it? And so that is why we have thought
it was the right thing to do.
Q: ( inaudible).
PM: Well APEC has a certain congruity to it. It is the countries who have
trading and strategic interests together and it is in the Pacific rim, it is
Asia Pacific Economic Cooperation. It covers the two largest
economies the United States and Japan who have, of course, a huge
trade problem between them. It covers the largest emerging economy,
China, and it covers some of the fairly developed economies, like
Korea and, of course, the South East Asian, or ASEAN, economies.
Now from Australia's point of view, we trade with Japan. They are our
largest trading partner. Korea is our second largest trading partner.
We have a fairly big trade with the United States. We have strategic
relationships with the United States. The United States has strategic
relations with China, with Korea. So there is a congruity about APEC.
And I think the risk always with APEC is that it gets extended on a sort
of good-neighbourly basis, so well why not let the old Soviet far east
in. You know, the Russian far east, or India, or Peru. Well I think we
run the risk then that it is neither one thing nor another. It is not an
Asia Pacific body and these are countries that don't have the
preponderance of their trade with the Asia Pacific. So I think it would
be wise for APEC to be fairly cautious about its membership into the
future for that reason.
Can I just say on the point about this other proposal, the East Asia
Caucus proposal. I mean I think our view has been that ASEAN is an
obvious sub-group of APEC and we are now having discussions with
the leaders of ASEAN about Australia, at some point, having a role
with AFTA, the ASEAN Free Trade Area, and in that way you would
have NAFTA being a sub-group of APEC, that is the North American
Free Trade Agreement. You would have Australia/ New Zealand CER
being a sub-group of APEC. You may have, potentially,
Australia-AFTA being a sub-group of APEC and then you would have
the other bloc economies, China, Korea, Japan.
So we think that sort of structure, basically, covers off the trade and
strategic interests in the area and I think, by and large, that has been
the view of most of the member states of APEC.
Q: ( inaudible).
PM: The question was for those who couldn't hear, it was about tax treaties
with Asian neighbours to avoid convoluted tax arrangements. Well,
you know, Australia we did have a foreign tax credit system. But in
such a system everyone has to account the rates of tax let's say
they are an international company. They have got companies in
Europe, companies in North America, businesses in Asia. You have
got to take the tax rates that apply in all these, aggregate it, bring it
back, we give you a credit for it and then you pay up to the corporate
rate or not.
When we reduced the company rate to 39 per cent, it was so close to
the average of the OECD countries some at 38 per cent, some at
36 per cent we thought we would remove this huge burden on
business of keeping this constant accounting going for
1 or 2 percentage points of difference. So we developed what we call
a white list of countries. If you invest in the countries which are on the
white list, you can bring your dividends home, no foreign tax credit
system, simple repatriation. If you are not on the white list, you are on
the other list, and the other list of countries which includes tax havens.
But in some countries which have very concessional corporate tax
rates and they have them for development reasons, we have a concept
called tax sparing and in our double tax agreements, we recognise tax
sparing. For instance we recognise tax sparing with Malaysia, we
recognise it with Indonesia.
In other words, if somebody wants to invest in those countries and take
the benefits of their concessional rates for a particular period of time,
17
then we will give them a tax sparing credit. But if they want to invest in
Hong Kong and it is just a name on the wall of an accountant's door,
we have an active and passive income test.
So if you're Pioneer Concrete and you have been in Hong Kong
making concrete for 36 years, you pass the active income test. But if
you're pushing income through Hong Kong and you are just a plate on
a Hong Kong accountant's door, well then you don't pass the active
income test and therefore we tax you on an accruals basis when you
come home. Now what can be fairer than that?
ends