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

Peter Costello

Treasurer

11 March 1996 - 3 December 2007

Transcript of 23/03/2005

Press Conference
Parliament House, Canberra

Wednesday, 23 March 2005
3.15 pm

 

SUBJECTS: Honouring the GST agreement, Tony Abbott

TREASURER:

Ladies and gentlemen I have two releases for you. The first is number 22 which is headed up “Meeting of the Ministerial Council for Commonwealth State Financial Relations” and that was what was agreed at today’s meeting of Commonwealth and State Treasurers. The second is number 23 which is headed up “Australian Government proposal to eliminate further indirect taxes” and that is the more interesting of the two and so I will come to that in a moment.

Number 22 confirms the payments which were discussed at today’s ministerial meeting. It notes by the way that no State at today’s meeting requested a change or variation to the relativities. So whatever State treasurers might have said outside this meeting, no State treasurer requested a change to the equalisation process.

It notes the Specific Purpose Payments, competition payments, the administration issues. There was a minor increase in the amounts required for administering the GST and the approval of loan allocations.

Now under the Intergovernmental Agreement, 2005 was set as the date to review further State indirect taxes. That review was conducted by the Heads of Treasury, that is both State and Commonwealth, and after that review the Australian Government put a proposal to eliminate $8.8 billion of indirect taxes. I will explain what that proposal was in a moment. No proposal was put forward by the States. At the end of the meeting they asked whether they could have 4-6 weeks to caucus together to see whether they could put an alternative proposal. The alternative proposal would go to timing and sequencing the elimination of the State taxes in the Intergovernmental Agreement. I indicated to the States that if they wanted to put another proposal to the Commonwealth within 4-6 weeks and it went to the question of timing and sequencing that the Commonwealth would consider it.

We will see whether such a proposal is made. I indicated to them that this is a very important issue and if we couldn’t get agreement today we would be prepared to wait for their proposal because consequences are that if there is not an agreement on the timing and sequencing of the elimination of these taxes then the IGA will have been breached and that is a very, very serious consequence.

Now let me explain to you the proposal which the Commonwealth put to the States, the only proposal which was put to today’s meeting. It was a proposal to eliminate a list of State taxes on 1 July 2006, including stamp duty on mortgages, stamp duties on cheques, stamp duties on credit arrangements, stamp duties on leases – some of the States have already abolished these and some haven’t. But it is a proposal for those that haven’t to do that on 1 July 2006 for a second round on 1 July 2007 which would get rid of stamp duties on goodwill, supply rights and intellectual property and a third round at a date to be agreed to get rid of stamp duties on real property.

The elimination of those State taxes would leave every State still in a windfall position except for New South Wales which would need an additional amount to be guaranteed and the Commonwealth offered that additional amount to New South Wales so that it would not be worse off.

Now under the Intergovernmental Agreement - let’s get our head around the numbers here – the States will receive over the next five years $207 billion of GST revenue. That will include $16 billion over and above the guaranteed amount. The Commonwealth proposal would eliminate $8.8 billion of indirect taxes leaving the States in a windfall position after the elimination of those taxes of around $7 – 7 billion. And I want to be very clear about this point – the implementation of the Commonwealth’s proposal would still enable the States to be in a windfall position, that is, over and above the guaranteed amount.

Now the reason we put this proposal is when the Intergovernmental Agreement was negotiated, I negotiated it, so I am pretty familiar with the detail, the offer to the States was that for the introduction of GST other inefficient taxes on businesses would be removed. And originally they were all going to be removed in 2001. When the GST revenue was applied to a narrower base as part of the deal with the Australian Democrats it was clear that all of those inefficient taxes could not be abolished immediately. And so we agreed to prioritise the ones to be abolished immediately and said in 2005 we would review the situation so that if the GST revenue was sufficient we could continue the elimination of those taxes.

This was always integral to the Commonwealth proposal. The GST was not a new tax in addition to the existing indirect taxes, but a replacement for the existing indirect taxes. John Howard, me, everybody in our Party campaigned throughout Australia and made a solemn promise to the people of Australia that it would be used to eliminate other indirect taxes.

There was never any question about that. Everybody in Australia knows that and in fact the famous document, ‘Tax Reform, Not a New Tax System.’ Page 79; ‘The Commonwealth supports abolition of the following taxes and is including funding for their elimination as part of the package.’ And then set out all of those matters. So it’s a question of ensuring that people aren’t double taxed. Never the intention that business or consumers would get the GST and the indirect taxes that it was designed to replace, they would get the GST in place of the indirect taxes. That was always the intention.

Now that we are five years into the administration of the GST, now that there is the capacity to eliminate those taxes, that should be done. We put down a proposal to do that, starting in 2006. It is easily manageable. It leaves the States all in a windfall position and no alternative proposal was put today. Now, if the States and Territories want to put an alternative proposal on timing and sequencing of the elimination of those State taxes, and they’ve asked for 4-6 weeks to do it, and we’ll await their counter proposal.

JOURNALIST:

(inaudible)?

TREASURER:

Well until such time as the States and the Territories make a counter proposal, this is the only proposal and the implementation of the agreement requires the continuing elimination of those taxes.

JOURNALIST:

The Treasurers are saying that in the meeting you said if they failed to do that, you would be able to somehow compel them.

TREASURER:

No, but I made the point in the meeting and I make the point here. If the States and the Territories refuse to eliminate the taxes which were identified for elimination, that would be a very serious breach of the inter-Governmental agreement.

JOURNALIST:

(inaudible)?

TREASURER:

Well, what are the consequences? Well, we’ll come to that hurdle when we come there. But I want to say the Commonwealth is making every effort to keep this agreement on foot. We’re the only people that made a proposal and this is absolutely unheard of. We have given the States another 4 to 6 weeks to put a counter proposal. That’s how serious we are about keeping this on foot. But this agreement will not be honoured if the States say they can keep GST and the indirect taxes, which it replaced. That will not be honouring this agreement. That will be bringing it to an end.

JOURNALIST:

If the States breach the agreement, does the Commonwealth then consider itself no longer bound by the elements that apply to it?

TREASURER:

Well if the States breach the agreement we’ll announce our response then. But I don’t want them to breach the agreement.

JOURNALIST:

You said the agreement would come to an end if they didn’t honour it.

TREASURER:

Well if there are two parties to an agreement and one of them says that they won’t honour it, there is now no longer an agreement.

JOURNALIST:

But could it end up in court?

TREASURER:

No, I don’t think it will go to court.

JOURNALIST:

(inaudible) the money?

TREASURER:

Well I’m not going into what would happen because I would rather keep this agreement on foot. And, can I tell you this, I think the States would rather keep this agreement on foot. This was an agreement entered into in 1999, which, whilst it is in place, delivers them $207 billion over the next five years and I don’t think they would want that agreement to come to an end. I certainly wouldn’t want that agreement to come to an end because then I’d have to negotiate some new agreement. So I’ve given them 4 to 6 weeks. They asked for 4 to 6 weeks, I’ve given them 4 to 6 weeks. If they come up with a counter proposal, we will discuss it. If they don’t, then we would assume that this would be implemented.

JOURNALIST:

Treasurer, do you think you’re winning the argument out there in punter land or do you think the States arguments are cutting through?

TREASURER:

I think out there in the public, they know. Everybody knows that the GST was introduced to get rid of other taxes. Every Australian knows that. And we went through an election in 1998. We published the policy. We signed an agreement. Every Australian knows that the GST was introduced to get rid of other taxes. And I come across people all the time that say, you said you’d introduce the GST and these other taxes would be abolished, when are the going to be abolished? And to those people I say, the Commonwealth can continue to abolish them under this proposal from 2006, from 2006. But we’re not going to sit around and say to those people, ‘Oh, well, sorry, the States want to keep both their indirect taxes and the GST’. We’re not going to do that. We told the public, this was a replacement tax. We published it. I campaigned in a Federal election. We signed an agreement.

Sorry. Up the back. I’ll take hands from now on if I can.

JOURNALIST:

Mr Costello, these sort of taxes that were concerned back in 1999, the concern that businesses have, say in Victoria, plus your State colleagues, is land taxes. Isn’t that the key problem now?

TREASURER:

Well if the States are swimming in land tax, they can cut their land taxes.

JOURNALIST:

(inaudible)

TREASURER:

Well, hang on, hang on, let me finish. The Commonwealth said you will get a new tax, GST, if you abolish the following. The States never asked for land tax to be funded out of GST. And there’s a reason for it, land taxes are a very good income base for them. Now if their land tax has gone up 50 per cent or 100 per cent, they can cut land tax and not be worse off.

There never was any cross-subsidisation from GST to land tax. I don’t say to a State, ‘Oh, the State better send me some money so I can cut a company tax’, I don’t say that because if your company profits boom, you can adjust your rates accordingly. We in fact did. Now, the answer to your question is, the States, of course they can do both. They can cut land tax out of booming receipts and they can cut indirect taxes out of GST revenues. But, you know, I want you to come back to this point. The GST was never introduced for the abolition of land tax, nor did the States ever ask for it.

When we offered the States GST revenue, and I negotiated the agreement in 1999, we said to them, you tell us, you tell us what taxes this should replace, and the list is their list. And it wasn’t land tax. So the answer is of course they can do both. I’m sorry, yes.

JOURNALIST:

Is it true that the grant system as it stands punishes NSW for having stamp duty on real estate and payroll tax too low?

TREASURER:

No, look can I come to horizontal fiscal equalisation which is a long word, I know. Ever since the Federation, one of the reasons why the Federation was formed and one of the underlying purposes of Federation was that the biggest States would help the smaller States.

But if you don’t agree with that principle, you don’t agree with Federation. Wouldn’t have happened. Now you can argue about how the formula works. When we signed the agreement, we said that there would be equalisation. Let me tell you something: no State Treasurer today asked for equalisation to be abolished. No State Treasurer today objected to the equalisation principle. So, you know, you know I was very surprised that none of them did, because I’d heard them on the radio. So I said ‘Is anyone objecting to this?’ Nobody.

JOURNALIST:

Some of the State Treasurers, particularly Queensland, Terry Mackenroth says, ‘I agree with the windfall, but I’ve spent it all, I’ve spent it all on programs like running an extra year of school for little kids, or a new child welfare department’. What do you say to those who say, ‘Well, we just can’t afford to give you this and you are asking us to cut services’.

TREASURER:

Well, you know, you going to have a look at these figures. Let’s just have a look at the windfall that the Queensland Government has received because…

JOURNALIST:

He doesn’t dispute that, Treasurer.

TREASURER:

Well they are the most notorious case of windfall. In fact, one of the things that gets the other States going, with all due respect, is the size of the windfall that has accrued to Queensland. That’s one of the things that gets them. Let’s just go through it. In 2004-05 do you know what his windfall was? $735 million. That was just his windfall. He got $6.6 billion, a windfall of $735 million. In 05-06, that’s next year, he’s got a windfall of $578, now I don’t know how much, what did you say he had an extra Child Care Department?

JOURNALIST:

He put up a new Child Care Department.

TREASURER:

Did that cost him $735 million last year and $578 million this year?

JOURNALIST:

Are you saying that it is unreasonable of him to have used the windfall projections for programmes because he didn’t leave himself any space to abolish indirect taxing?

TREASURER:

No I am saying that I can’t believe that he spent all of that windfall on a Child Care Department, that is what I am saying. And I think I would be pretty fair in making that observation. Yes. Sorry.

JOURNALIST:

Would you like the State Liberal Oppositions to do more to back your case?

TREASURER:

Well I would recommend you go and interview them all and give them the chance to back my case. I think they say they find it hard to get coverage but yes of course I would welcome their support. Put them in your newspapers, give them the opportunity. Sorry, yes.

JOURNALIST:

Treasurer you say you are prepared to consider counter offers from the States regarding timing and sequencing, would you be prepared to consider counter offers from the States that involve different amounts of Budget Balancing Assistance?

TREASURER:

Well what I said to the States is if you want to make a counter offer make it about these taxes and make it timing and sequencing, we are not going to entertain offers about things that weren’t nominated in the IGA, I have got enough trouble keeping them to those that were nominated in the IGA, so you know that is my answer to that. And look, I don’t think there would be a need for any more Budget Balancing Assistance because you have got to bear this in mind, there would only be a need for more Budget Balancing Assistance if they were more aggressive than my timetable. Everything I hear from them is they are proposing to be less aggressive than my timetable.

JOURNALIST:

Mr Costello…

TREASURER:

I am sorry, (inaudible).

JOURNALIST:

These figures assume that none of these taxes (inaudible) particular States, do you have any (inaudible) of what the actual amount of those taxes are still in place?

TREASURER:

No the cost of tax cuts outlined in the second table is the cost of my timetable on those taxes that still exist. So, yes it is, so just to give you an example, you will see that for example Victoria is a lot less than New South Wales, see Victoria in 06-07 is $263, New South Wales is $420. One of the reasons for that is Victoria has already abolished the stamp duty on mortgages. These are the costs given to us from the States as to what that schedule would cost for the State taxes they still have in place.

JOURNALIST:

Mr Costello you some time ago said that you were going to make the States more accountable for spending, (inaudible) what did you say to the Treasurers today about that and how are you going to do it?

TREASURER:

Well I wasn’t really talking today about the expenditure side, what I was talking about today was the revenue side.

JOURNALIST:

Why did you decide not to talk about the expenditure side…

TREASURER:

Because…

JOURNALIST:

…when you made a big thing of it a couple of weeks ago?

TREASURER:

…because today was the day when the Ministerial Council had to review the indirect taxes. This, can I say, this date has always loomed large in my mind because this date was set in 1999. In 1999, 2005 was set for the year when this would be up for grabs. And I have been working every year towards 2005 and that is why I had my proposal out there.

JOURNALIST:

The spending loomed large in your mind a couple of weeks ago.

JOURNALIST:

Treasurer, if the States don’t…

TREASURER:

My mind has its limits Michelle.

JOURNALIST:

…Treasurer…

TREASURER:

It can only have large looms one at a time if I may say so.

JOURNALIST:

…Treasurer if the States don’t play ball, given you take control of the Senate from July 1, could you envisage a scenario where you re-write the IGA and get it through the Senate with…

TREASURER:

You know Steve, what I have learnt in this business is when you answer questions like that somebody will say oh you are trying to bludgeon the States or you are trying to threaten the States and they will use that as a reason not to come to an agreement. So, I just want to say this, I want to come to an agreement and if we don’t come to an agreement all of these what ifs won’t arise. If we don’t come to an agreement…

JOURNALIST:

(inaudible).

TREASURER:

…well if I don’t I will face that with all of the fortitude I can muster at that time.

JOURNALIST:

Treasurer to ensure that consumers don’t get hit doubly by the GST and the continuation of indirect tax…

TREASURER:

I have got to (inaudible), please finish but I will try and have some order because there are people bouncing everywhere.

JOURNALIST:

…would you ever consider reducing the rate of the GST?

TREASURER:

No I am not proposing any changes to the rate, no. The rate was set by agreement, it was set in the Intergovernmental Agreement and can I say this to you, this is a very important point. When we set the rate we gave the States the estimates of what we thought it would raise and we asked them to nominate the taxes they would like to abolish. I didn’t think up this list. This list was thought up by the States in 1999 and can I tell you why they came up with this list rather then land tax or stamp duty, they never came up with land tax. I will tell you why. Because land tax is on an end user, these are taxes on business. The whole object of the GST reform was to take taxes off business. GST was a consumption tax. GST is borne by an end user. So the whole idea was that by getting rid of these indirect taxes on business, you took taxes off business inputs, like wholesale sales taxes, like stamp duties, like FIDs, like BAD, so that there would be no taxes on business inputs and taxation would be collected by the end user, the consumers. That is why sometimes it is called the consumption tax. That is why they came up with this list. I have said to you earlier I think that probably a second reason was that the revenues of the GST was probably never big enough to eliminate land tax and we all probably agreed on that aspect and the third reason is because remember this, the GST was not for tax reductions, it was for tax eliminations. The third reason for that was that I think the States probably always wanted their own tax base. Now you have got to bear this in mind. The GST is not the sole item of revenue for a State. A State has GST but it also has its own source income, its own source incomes are things like land taxes, stamp duties, payroll tax, I’m sorry, yes.

JOURNALIST:

The US Federal Reserve’s decision this morning, what does that do for the outlook for the Aussie?

TREASURER:

For the Aussie Dollar?

JOURNALIST:

Yes.

TREASURER:

Well the US Federal Reserve increased interest rates by 0.25 per cent overnight taking the official rate to 2 . The statement that the Fed made indicated that it believes monetary policy is still accommodative, which probably indicates that there are further rate rises to come in the US and if you actually look at the market, the market has actually priced in further rate rises. This would not be unexpected because the US is an economy coming out of recession. Official interest rates were abnormally low and now they are being moved back to more neutral areas, more neutral levels. It is quite different to Australia, Australia was never a recession economy, it was never. We avoided the US recession of 2001-2002 and as a consequence our monetary policy has been more stable.

JOURNALIST:

Treasurer is there anything in the original agreement that would prevent you from withholding GST revenue from the States if they don’t come to the party on these indirect taxes?

TREASURER:

Well the agreement provides that all GST is received by the States. Whilst the agreement is on foot all GST is received by the States.

JOURNALIST:

If the agreement is breached you would then be in a position to withhold funding from the States, is that correct?

TREASURER:

I am trying to avoid a breach of the agreement.

JOURNALIST:

Would you rule that out absolutely?

TREASURER:

What a breach of the agreement?

JOURNALIST:

No, withholding GST revenue from the States in the future?

TREASURER:

I will rule out the Commonwealth breaching the agreement and call on the States to do the same.

JOURNALIST:

I was just wondering what your message is to people who are paying these taxes? It’s a veiled threat to the States but meanwhile as you said people come to up to you and they are paying both these taxes?

TREASURER:

That is a very important point. If these taxes were eliminated I don’t get another dollar, the Commonwealth doesn’t get another dollar. I am sorry, we don’t get any revenue from these taxes. What happens is that businesses and consumers pay less and businesses and consumers ought to pay less. And businesses and consumers were promised that when the GST was introduced it would not be a new additional tax, it would be a replacement. And I have got to say to you it wouldn’t have been introduced if it had been thought that somewhere down the line they would get all of the current taxes plus. It was the current taxes abolished and the GST in place. And that is why I feel very, very strongly. You know, some people say this is a contest between the Commonwealth and the States. This is not a contest between the Commonwealth and the States. This is a question of keeping faith with the Australian people and the Australian people were told that the GST would replace these other taxes and it should.

JOURNALIST:

So this is no hollow threat that you are talking about?

TREASURER:

No, no, no, the Commonwealth Government which after all did all of the legwork in introducing this system, let me remind you of that. Let me remind you that the State Governments which now so lovingly caress the GST revenues were opposed to it being introduced. Let me remind you of that. And who did all the hard heavy lifting in introducing it? The Commonwealth Government. And what did we promise people? We promised people that when this system was up and running it would replace other indirect taxes. This is a matter of centrality for the Commonwealth Government. This is absolutely central. Journalists, fair enough, go back and look at what we have said on the record about all sorts of things. Go back and look on the record how many times we promised the Australian people that the GST would replace other taxes. You will find it thousands of times. All through the 1998 election campaign. All through this document. Over and over and over again. And we named the taxes, from memory it was eight taxes and now the time has come and to be frank with you this is, you would be wrong, you would be absolutely wrong to characterise this in some way as a stoush between the Commonwealth and the States. You know, we see this as a matter of keeping faith with the Australian public. I am sorry was it Ross, were you flashing your hand? No. OK, last three. You have all had, last three. Tim and then the two ladies.

JOURNALIST:

Just on the (inaudible) business (inaudible) more profitable as a result of tax that has been taken off and it is the company tax at 30 per cent then 30 per cent of that $2.4 billion will end up at the Commonwealth so surely you are a beneficiary (inaudible)?

TREASURER:

Well it depends what happens. If the business, let me make this point, if the business passed it through to consumers, they wouldn’t become more profitable would they? And that was the original theory that they would be fully passed through. So I am just saying to you, you know, the object of this is not to somehow produce a financial benefit for the Commonwealth, the object of this is, here is the policy, I wrote it, you know. “The GST will eliminate the following taxes: Financial Institutions Duty, Debits Tax, Stamp Duty on Marketable Securities, Conveyancing Duties on Business (inaudible).” Now there they are, one, two, three, four, five, six, seven, eight, nine – we said thousands of times it is going to replace nine other taxes. Now we have got about four of them out and the States are saying you know, change your policy after the event, make it a replacement for four instead of nine. Now, we will discuss the timing and the sequencing, but it is not my intention to put them in a position where they go negative. But it is timing and sequencing that we are discussing, not the point.

JOURNALIST:

Is it possible that the Commonwealth will come with a second offer?

TREASURER:

No, that is our offer. Well, that is our offer, it they come back and it is a meaningful offer of course we will talk to them about it but I don’t want to foreshadow sort of negotiations if they come back with an offer but I am not going to come up with another offer, I am waiting for the States to come up with another offer.

JOURNALIST:

You are asking States to eliminate State taxes on the basis of revenue windfall, does that mean that if you get a revenue windfall in this year’s Budget you will be eliminating some federal taxes?

TREASURER:

Well we have always said that if we can pay for our services and have a decent surplus and keep taxes low that is what we aim to do and that is what I did last Budget.

JOURNALIST:

And Treasurer at risk of changing the topic rather dramatically I just wonder what your thoughts have been in the last few days watching your colleague Tony Abbott go through some intensely personal revelations in the public eye?

TREASURER:

I feel for him very deeply. I told him this, I had a conversation with him yesterday, I passed on to him my feeling for what he has been through, you talk about the highs and the lows, to have thought you have found a child and then to find out that you never had the child must have been one of the most roller coaster rides you can imagine and I think he has handled it with great dignity frankly, great dignity. Having said all of that, let’s not forget the boy, the poor boy got dragged into this because it was thought he had a famous father who in fact he didn’t have. And he has now been splashed all over the newspapers and if this had been known at the outset nobody would have known the story, nothing would have happened. The poor mother, I saw the poor mother on TV last night, fancy having to answer questions like that, you know, I thought it was just, she was very brave to do what she did, the most intrusive personal questions you can imagine, so all I can say is that I think they have all handled it with great dignity and great character and let’s get back to things we are better on like tax and defence and security and those sorts of things. Thanks very much.