The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
Picture of Peter Costello

Peter Costello

Treasurer

11 March 1996 - 3 December 2007

Speech of 2/06/2007

ADDRESS
TO FEDERAL COUNCIL

THE WESTIN HOTEL
SYDNEY

SATURDAY, 2 JUNE 2007

***CHECK AGAINST DELIVERY***

Thank you very much Madam President, Chris McDiven; Prime Minister, distinguished members of the Federal Council.

I was speaking yesterday to the Business’ Observers lunch and one of the people there said to me that he had been working in Hong Kong for the last 17 years. He had just come back to Australia to continue his career with an international company and he said: ‘Australia is very different to the Australia I left 17 years ago.’ It is very different. This is a different country to where we were back before 1996. We have a lot more confidence. We are much more confident about our place in the world. And we have got 2 million more people in work. We have proved that, far from becoming the poor country of Asia, through significant financial crisis, Australia was the strong man in the Asian region – able to come through a financial crisis and lend a hand. To lend a hand in the financial crisis, to lend a hand when the Tsunami hit Indonesia, to lend a hand in East Timor.

I had the privilege of hosting Lee Kwan Yew at a dinner in Canberra recently and of course ringing in my ears, as was ringing many other all Australian ears, was a statement that he had made in the mid-80s – that Australia could risk becoming the white trash of Asia. And I said to him:- ‘do you remember making that statement?’ And he said:- ‘practically every Australian I have spoken to since I have been out here has reminded me of that statement.’ But he said, ‘your country is very different today to what it was in the mid-1980s.’

And it is. The past is another place for us and we don’t want to go back there. We don’t want to go back to where we were in the late 80s and the early 90s. We don’t want to go back to high unemployment. We don’t want to go back to budget deficits. We don’t want to go back to strikes and stoppages. What we want is to go forward as a prosperous country, confident and free. And that takes economic management.

I recall in the 2004 election, the then Labor leader Mark Latham, when he was announcing his economic policy got a huge a piece of cardboard. And he wrote on it a pledge to keep interest rates low. And the Labor Party said, ‘there you go. We have fixed the interest rate problem now, haven’t we? Mark has pledged to keep them low. There it is, it is in writing, it is on a piece of cardboard. That issue has been dealt with and we will move on the next issue.’

The press came to me and said, ‘well, how are you going to respond to Mark’s policy? He has got a pledge to keep interest rates low, how do your respond to that?’ And I said to them, ‘well how silly am I? That is my response, how silly am I?’ Here am I, I have been working through nine Budgets, nine Expenditure Review Committees, I have been fighting in Cabinet over expenditures, I have been reforming tax systems, improving industrial relations systems all to keep interest rates low. And all I had to do was sign a piece of cardboard! I said:- ‘I am going home to apologise to my wife. All those months away from home, and it could have been fixed so easily!’

And I had one of those deja vu moments the other day when I switched on my television and there is an oh-so serious Kevin Rudd sitting in front of a high rise building saying, ‘I am an economic conservative.’ A little more sophisticated than Latham. We have moved now from the cardboard to the television commercial. But no more substantive.

You don’t become an economic conservative because an advertising agency cuts a piece of television footage. That is not how you become an economic conservative. You don’t become an economic conservative just because your focus group tells you that is what the public wants to hear. You become an economic conservative because you are prepared to fight for a few things, and do a few things:- because you are prepared to take hard decisions which work out in economic outcomes.

That is how you become an economic conservative.

You can’t just proclaim the results without doing the hard work. You and I know, everybody in our Party knows, that results come from hard work. We all know what it is to struggle, and to take hard decisions and to receive, eventually, some reward for the effort. And those people that turn up to take the reward for the effort have no entitlement to do so if they weren’t there when the work was being done.

And Mr Rudd was not there when the work was being done. When we were balancing the Budget, he was of no assistance whatsoever. When we were paying off Commonwealth Government debt, he was not supporting our policy. When I announced an independent monetary policy with inflation targeting with the Reserve Bank, the Australia Labor Party threatened to sue the Government, claiming it was illegal.

When we were introducing broad-based indirect tax reforms – such as the GST and getting rid of State taxes and cutting company taxes and capital gains taxes and income taxes – Mr Rudd was not there. In fact, he said when we introduced the biggest tax reform in Australian history, he said that that day would go down as the day in a hundred years where “fundamental injustice” came to our country.

He stood up in the House of Representatives on the 30th of June 1999. And he said, ‘when the history of Australia is written, over a hundred years, this will go down as a day of Fundamental Injustice.’

And so I have proclaimed the 30th of June this year as Fundamental Injustice Day. And in the House of Representatives I am counting down to Fundamental Injustice Day. You know, you have heard of Australia Day, you have heard of ANZAC Day, you have heard of Remembrance Day, now we have Fundamental Injustice Day. The day when we swept aside those state taxes, when we modernised our indirect tax base with a GST, when we cut income tax. And look how the country suffered as a result since Fundamental Injustice Day on the 30th of June 1999.

Now, nobody in their right mind, Delegates, today, nobody in their right mind today would say, let’s get rid of GST, re-introduce Wholesale Sales Tax, Financial Institutions Duty, Bank Account Debits tax, Bed taxes, stamp duties on marketable securities, let’s put up income taxes and let’s return to the way we were in 1999. Nobody. Not Rudd, not Swan, not the Labor Party – nobody.

But here is the difference. We were able to see what had to be done in prospect. They are able to see what should have been done in retrospect. And in politics what counts is not the ability to look back and to say, ‘yes, even though I opposed it, you were right.’ What counts in politics is the ability to look forward and see what has to be done and to do it. That is what counts.

Because if nobody had looked forward and seen what had to be done, we wouldn’t be where we now are. We would be where we used to be.

As the challenges come to us over the next decade, we don’t want people who are very skilled at opposing reform and then looking back afterwards and supporting it. What we want are the people who are able to look down the years and see what has to be done, see it in prospect, and do it. And that is the difference you see. All very well for Mr Rudd to say he is now an economic conservative. He agrees with balancing the Budget and paying off debt and reforming the tax system and cleaning up the waterfront and establishing a Future Fund. It is all very well to say that after the work has been done. But it is the ability to look down the years and to see it in prospect and to do it that really counts.

As I have said before in the House of Representatives, imagine you bought a block of land and you wanted to build your dream home and you went to the Council and you applied for a permit to build and the next door neighbour opposed you. Imagine if you had the foundations dug and the next door neighbour came and kicked them in. Imagine if you put up the frame and your next door neighbour came and pulled it down. Imagine if you had the bricks delivered and the next door neighbour hired a truck to take them away. Imagine if you painted the house and he came and he threw red paint all over it. Imagine if you had the plumber and he blocked up the pipes. And imagine if, after all of that opposition, just as you finished the house, the next door neighbour walked in and said, ‘I would like to live in this house.’

Imagine if you had done all of that economic work against the opposition of the Labor Party and they said, ‘we would really like to continue that policy,’ would you believe it? Would you believe it? You would be entitled to ask, would you not, well where were you when all of the work was being done?

No wonder you cut an ad saying “I am an economic conservative.” Who wouldn’t want to be an economic conservative now that the policies are producing results? But the policies are producing results because we had the commitment to make the hard decisions when it counted. And I don’t think Mr Rudd and the Labor Party have the ability to make the hard decisions when it is going to count. Decisions like standing up to unions. Decisions like preserving a more open system of industrial relations.

Let me say to you, when you are managing an economy, the problems never end. You know, it is a $1 trillion economy, it takes a little bit of work. Our Budget is about $240 billion. You have got to get up early in the morning, and you have got to work hard when you are managing a Budget like that.

And the challenges come. The challenges might change in nature, but there are always challenges. I like to say that in economic management, there are good problems and there are bad problems. But there are still problems.

A bad problem is mass unemployment. That is a problem we used to have. A good problem is labour shortage. That is a problem we now have. It is a problem. If you go around and you speak to the businesses of Australia, one of the things they will often say to you is we can’t find enough workers or we can’t find enough skills. This is a problem. But this is a good problem. This is a problem I would like to have. This is not a problem that Paul Keating and Bob Hawke had. This is not a problem that the Labor Party had back in the early 1990s. It is a problem, but as far as problems go, it is a better kind of problem to have.

Now when you are managing an economy, which now has an unemployment rate of 4.4 per cent, with 2 million additional jobs over the last 10 years, it is a problem that has to be managed. And let me explain why. We now have, in many areas of Australia, more jobs than people who are able to take them. We are pretty close to full employment.

In some parts of Australia we are now in full employment.

In some of the industries of Australia there is high profitability, the resource industries would be one of them. In other of the industries of Australia, they are really struggling:- agriculture – we are in the worst drought in 100 years – really struggling, struggling as much as they have struggled in 100 years. There are other industries which are in between. The manufacturing industry is suffering under a high exchange rate at the moment which is affecting their exports.

Now in an economy where you have got near full employment, where you have got some profitable industries, where you have got some industries that are being affected by adverse conditions and many in the middle, it is very, very important that you don’t take wage settlements out of profitable areas and start applying them across the board. They might be sustainable in profitable industries, but they will hurt those industries that are struggling and they will kill those industries that are on their knees.

It is very, very important that wage outcomes be based on an individual basis. It is very, very important that we don’t have pattern bargaining that takes one settlement and then by pattern tries to take it across the board. Very important that you don’t have an ETU that gets a settlement say in the Pilbara and then tries to take it through all the manufacturing plants of Australia. It might be sustainable in the Pilbara, it won’t be sustainable in Parramatta or Moorabin or somewhere else.

And if you want a good explanation as to how pattern bargaining works, let me recommend to you one of Australia’s great works of literature – Dean Mighell’s speech to the ETU at the Dallas Brookes Hall in October of last year. Now, you will have to overlook some of the adjectives that Dean uses but just read for the verbs and the nouns. It is an explanation as to how pattern bargaining works and how he used to do it so successfully in the early 1990s. And then he makes this complaint:- that under the current government’s industrial relations policy, it can’t be done, it is banned. And of course this is the legislation which Labor will get rid of – ‘lock stock and barrel’.

If you get rid of this legislation ‘lock stock and barrel’, not only is Dean back, but pattern bargaining is back. Oh, I know they will say, ‘we won’t allow pattern bargaining.’ I know they will say that. If they really don’t want to allow pattern bargaining, why are they repealing the legislation? This is the legislation that Dean says stops it, well why are you repealing it? In fact, the more I think about it, the more I wonder why are they repealing it? Why, at a time when the mining industry has made such use of AWAs, when we all agree that has been important to its success, why get rid of AWAs?

Now we all know why, because it is to put union power back at the centre of industrial relations. But what is the cover story? I am so bamboozled by this, I can’t even understand the cover story as to why AWAs have to be abolished. Or why it is that this legislation which stops pattern bargaining has to be done away with.

So we know that if Labor is back federally the unions are back federally. If the unions are back federally, we know pattern bargaining is back. If pattern bargaining is back, we know that wage settlements which might be acceptable in one area of the economy will spread. We know that in a society where we are close to full employment, that spells inflation and we know inflation will bring this economic expansion to an end. That is how Labor threatens our economic expansion.

That is how Labor threatens it. And if you bring back the centrality of union power, if the unions have their political party running the country again, that is the risk that Australia is facing. Greg Combet said it all didn’t he, in an unguarded moment when he said:- ‘we used to run the country and it would not be a bad thing if we did it again.’

Dean Mighell had an unguarded moment when he was caught down at the Dallas Brooks Hall. Now, Labor would tell you , ‘oh, Dean has been expelled, he has been expelled for bad language.’ They don’t say he was expelled for supporting pattern bargaining. The real reason why Dean got expelled is Dean belled the cat. Dean actually stated what the trade union movement intends to bring back on the coat tails of Kevin Rudd. And that is why they couldn’t have that out in the public arena.

It is a big risk to our economy and it is a big risk to the progress that we have made. Look, we don’t want to go back. We don’t want to go back to where we were. We want to go forward. And we want to go forward with economic managers and a government that can see what is right prospectively. We do not want those who oppose that change which they want to inherit retrospectively. That is the difference between the Liberal Party and the Labor Party.

Now, very, very briefly, because I think I have still got some time left, I am going to show you a few slides.

Column Graph: Underlying cash balance

You can see when our Government was elected the Budget was in deficit and the two red bars that you see up there are the projected outcome for 2006-07 which is the financial year ending on the 30th of June and our Budget project for 2007-2008. Our Government would have delivered ten surplus budgets after inheriting a budget which was in deficit and our budget surpluses are about 1 per cent of GDP as you can see in that graph both in 2007-08 and across the forward estimates.

Column Graph: International comparison on budget balances 2007 and 2008

This puts Australia in a different position to most of the developed world. The blue bar is our expected outcome for 06-07 there and the red bar is our Budget for 07-08. We are in surplus. The European area is in deficit, the OECD is in deficit, the United Kingdom is in deficit about 3 per cent of GDP, the US is in deficit about 3 per cent of GDP and of course Japan is in deficit.

Australia is one of the stand-outs in the international arena in terms of its fiscal position. Now, this just doesn’t happen by chance or by accident, it takes a lot of work. It doesn’t happen by cutting a commercial. It doesn’t happen by signing a piece of cardboard. It takes work. It takes management.

Combination Column and Line Graph: General government sector net debt and net interest payments

You can see the build up of debt in 1996 to $96 billion, about 20 per cent GDP under the previous Keating Government and our efforts to retire all net debt which you can see we got to in 2005-06.

There are our interest payments, that red line, and when we had $96 billion worth of debt we had to pay $8½ billion a year to service that debt. Now that we have no debt, you see, we don’t have to pay $8½ billion a year in interest payments. So that is giving us a saving of $8½ billion a year just from interest payments because we have managed to eliminate that net debt.

Do you see why Kevin wants to become an economic conservative now? When we were at $96 billion with $8½ billion of interest payments, Kevin wasn’t an economic conservative. Now that there is no net debt and we have got no interest payments, he has suddenly become one. Why wouldn’t you want to become one after you have seen these sorts of results?

Column Graph: General government cash balances

Now, Labor might say to you, well, ‘oh, anyone can produce a surplus budget, anyone can do that.’ Well let me tell you, Labor State governments can’t. This is what I put together for the Menzies Research Centre which shows the various State Government on a cash basis for 06-07, 07-08, 08-09 and 09-10, you can see New South Wales and these are done as a budget deficit to GSP – Gross State Product – New South Wales in deficit right across the forward estimates as is Victoria, as is Queensland, as is South Australia. And you compare that to the Commonwealth position which is the final position right at the end.

The second set of bars is the collective position of all of the States collectively – collectively – when you add up all of the States together, the Labor States are in budget deficit. The Commonwealth, the Coalition, Commonwealth Government is in budget surplus.

Column Graph: Non-financial public sector net debt

And of course here is the debt positions of all of the States. Above the line shows that they have net debt, below the line a net surplus position in terms of debt. You can see the Commonwealth, the very last bar has freed itself of net debt. We have negative net debt, I love that phrase – negative net debt. I remember when we first got to that situation the Treasury came in and said, ‘Treasurer, in the future we are going to have negative net debt.’ And I said, ‘that is great, what is negative net debt?’ And they said, ‘that is when net debt is negative.’ I said, ‘that is great, have we got any other names for that?’ They said, ‘no, no, we have never been in that position before, Treasurer.’

The collective position of the States, the second last one there, you can see collectively State Government debt is growing over the forward estimates and that is the additional $58 billion which the States and their corporations collectively will borrow over those years.

So we have a situation now where the Commonwealth has got rid of its debt, the Commonwealth is adding to savings, and the States are running up debt. If you want a difference between Labor and Liberal, that is it. If it is all so easy to balance the Budget and retire debt, why aren’t the State Government’s doing it? The truth of the matter is they have had very strong revenue growth since the introduction of the GST, the revenue growth has been entirely consumed by recurrent expenditures, and their capital spending is now being funded by debt. So in the financial markets, whilst the Commonwealth is saving which is putting downward pressure on interest rates, the States are borrowing, which is putting upward pressure on interest rates.

Now if you take the Commonwealth out of that graph, you have got a collective state position of deficit and debt. Now add in a Federal Labor Government, you are starting to see some of the risks emerging. And I think as the good former State public servant that he is, Kevin will not be able to stand up to State Premiers.

I must say to you, every now and then you do have to say no to a State Premier. You have to be prepared to do what is right. And I don’t think he will have the strength to do that either.

Very briefly, let me finish just by talking about some tax changes, because I know you might be interested in this. We will go to the current tax tables and the tax tables as they will be on the 1st of July 2007.

Table: Work incentives from income tax reform

You can see under the income tax tables from the 1st of July 2007, there is no tax on the tax free threshold up to $6,000. There is a 15 cent tax – this is for everybody – on their income between $6,000 and $30,000. A 30 cent tax on income between $30,000 and $75,000, a 40 cent between $75,000 and $150,000 and a 45 cent tax rate over $150,000.

In our second stage, announced in the Budget from 1 July 2008, we will move those other thresholds so that you will pay a top tax rate of 30 cents between $30,000 and $80,000, you will pay a top tax rate of 40 cents between $80,000 and $180,000 and the top marginal tax rate on your first dollar over $180,000.

Some people say, ‘oh well I earn $180,000 so I pay 45 cents on all of my income.’ That is not right. Everybody gets the 0, the 15, the 30 and the 40 rate. The top rate is only on your first dollar and thereafter over $180,000. There are only 2 per cent of Australians who are on those incomes by the way, and 2 per cent of Australians who are on the top marginal tax rate. 80 per cent of Australians are on that 30 cent tax rate or less – 80 per cent of Australians. When we came to office, 30 per cent of Australians were on a tax rate of 30 cents or less. Now 80 per cent of Australians are on a top tax rate of 30 cents or less.

Column Graph: Continuing personal tax reform

And if I can go to my next slide, over the last three years I want to show you the way in which we have cut income tax, particularly for low and middle income earners. That is the tax that you were paying at various incomes at 15, 20, 25, 30, 40 and 50 thousand in 2004-07. After three years these are the kind of tax reductions you have had on those incomes: for example on $30,000 your tax cut has been 45 per cent in the last three years. On $25,000 your tax cut has been 41 per cent over the last three years – that is three years.

So the point I am trying to say to you here is not only does the Government balance its Budget and retire debt. This is a government which is cutting tax, and cutting tax very significantly, for the bulk of Australians that are earning $30,000, $40,000 and $50,000.

Table: Personal income tax cuts

Let me show you how the income tax scales have moved since this Government was elected. When we were elected you used to pay 20 cents between roughly $5,000 and $20,000; 34 cents between $20,000 and $38,000; 42 cents between $38,000 and $50,000 and you paid 47 cents on every dollar over $50,000. Every dollar over $50,000 you paid a rate of 47 cents. And we have cut all of those rates and we have moved all of those thresholds.

Between $20,000 and $80,000 under the Labor Party’s tax scales you paid rates of 34, 43 and 47 cents. Between $20,000 and $80,000 you now pay a top rate of 30 cents in the dollar.

This is a very, very significant change over the last 10 years and you don’t go on the top marginal tax rate, which is a lower top marginal tax rate now, from 1 July 2008 until your income goes above $180,000. This has made the Australian tax system much more competitive for most Australians. Most Australians are earning $80,000 or less. For most Australians, they do not have a higher marginal tax rate than 30 cents in the dollar.

And that is just part of the change that we have reached in the tax system.

The other part of the change were the changes to Wholesale Sales Tax and Indirect Tax, the cuts to Capital Gains Tax, the cuts to Company Tax, full dividend imputation and the remainder. This is reform, this is serious reform. And people say, well how can you afford to cut tax rates like that? Well, there are more people in work. If you have got 2 million more people in work who, instead of drawing down on unemployment benefits, are now contributing to the tax system, you can raise revenues with lower tax rates. And that is what our Government has done.

And so you see a story coming together of tax reduction, balancing budgets, paying off debt, structural reform. And when all of this work was being done, the Labor Party was nowhere, opposing all of it. We now have a situation where Labor says they may not have a tax policy at the next election. In other words, after 11 years of being in Opposition, they can’t think of a way to improve the tax system.

But the tax system wouldn’t look like it does in that second column if the Labor Party had been in office. It would have looked much more like it did in 1996 when the Labor Party was thrown out of office.

They can see in retrospect what needs to be done but they could never see it in prospect. They would like to inherit the results but they don’t want to do the hard work. They want the benefits but they don’t want the policy dedication. Politics is much, much more than signing pieces of cardboard and cutting television commercials. Politics is about management and strength and hard work and policy and seeing what can be done, not turning around and endorsing it after the event.

And that is why I don’t think Australia can afford to let go of these achievements and the policies that have got us to where we now are. The past is a different country and we don’t want to go back there. We want to go on to a much better future in a much better country. Thank you all very much.