I am delighted to have been asked to address the American Chamber of Commerce today on the topic of the Australian economy and getting the settings right for business: particularly so in light of the significant contribution the Chamber has made in promoting trade and investment between Australia and the United States over the past 40 years.
In discussing the Australian economy it is important to put it in a global perspective so I would firstly like to talk about the current global economic conditions before moving on to discuss how Australia is placed in that global context. I will then discuss a number of Government initiatives and legislative reforms designed to ensure the economic settings are right for business.
Australia's Economic Performance
As many of you in the room today will know, the Australian economy is facing a range of external challenges at the moment. The volatility we have seen in global financial markets - especially in the United States - is creating some concern in the international investment community.
When this volatility is accompanied - and no doubt caused to some extent-by the recent corporate governance difficulties (for example, Enron and Worldcom) and what now appears to have been three quarters of negative growth in the US, it is not that surprising that investor and consumer confidence has been tested.
That said, to date the Australian economy has exhibited remarkable resilience in the face of challenges abroad. It is an uncertain time internationally. But the ongoing strength of our economy is something about which Australia can be proud.
As the Treasurer said yesterday: "We have stood down the Asian financial crisis, we outlasted the American recession of 2001 and let's hope that the American economy will come back in 2002 and 2003."
As you all no doubt appreciate, the US economy is important not only to Australia, but world growth more generally. The US represents around 20 per cent of global economic activity. As a result, it doesn't take very much for a significant slowing in the US to hit the world economy quite hard.
The main concern at the moment is the extent to which the large falls in US financial markets persist, because the impacts on the real economy could be quite significant if this loss of wealth is not restored.
The Federal Reserve last night chose to keep interest rates steady, and while it's clearly not appropriate for me to comment on that decision, the commentary from the Board indicated that they were concerned that economic weakness, rather than inflationary pressures, was the greatest threat to the economy.
European growth is mixed, but if the US slows further, the degree of concern and uncertainty about the global economic outlook will only increase.
That said, Australia continues to have one of the fastest growing economies in the industrialised world, and at this stage our strong growth looks set to continue in the coming year.
This is evidenced by Australia's GDP growth rate, which was 4.2 per cent through the year to March 2002, in line with the strong growth recorded during 2001.
The business investment outlook is strong and corporate profitability remains at above long-run averages. Australia's labour market is the strongest it has been in over a decade with close to one million jobs created since this Government came to office. During this period, the unemployment rate has also fallen from 8.2% to 6.2% in July this year.
This performance has been the result of sound macro-economic management and continued micro-economic reform making Australia one of the most open and competitive economies in the world.
Policy measures introduced since the Howard Government came to power, including reforms to regulatory, and taxation, systems have delivered long term structural benefits to the economy ensuring that Australia can now boast a stable economic environment conducive to longer-term productive investment.
Australia's strong performance has been achieved during a time of stable prices - over the past five years inflation has averaged around 2 per cent. Further support for this low-inflationary environment was confirmed in today's ABS release suggesting a continuation of moderate wage-cost pressures.
This environment of high growth together with low inflation and interest rates has created an environment conducive to business investment.
After the investment lull following the Asian financial crisis, the dual trends of stronger profitability and higher commodity prices continues to drive an investment recovery in Australia, as indicated in the latest ABS capital expectations data.
Business investment is forecast to be a very strong 12 per cent in 2002-03. This can only be helped by the recent announcement that Australia has secured LNG gas supply deal to China which is expected to be worth between $20 and $25 billion over 25 years. This is Australia's largest single export deal.
There is no doubt that the global debate about corporate governance and its regulation is one of the most important policy challenges facing Governments today.
As investigators sift through the corporate wreckages such as Enron and Worldcom in the United States, and HIH and OneTel in Australia, the most important task for legislators is to ensure there is a proper framework to address any systemic failures that are identified.
United States
To my mind, what has really shaken investor confidence in the US is the appearance that the system is able to be manipulated from the inside.
The need to restore confidence in the United States in the institutions that regulate corporate behaviour has seen the signing into law by President Bush of tough new measures in the Sarbanes-Oxley Act of 2002.
As most people here would be aware, these new measures, amongst other things, implement tough new provisions to deter and punish corporate and accounting fraud and corruption, create a public company accounting oversight board and strengthen the independence of firms that audit public companies.
Australia
In answering the questions of what lessons need to be learned in Australia and what solutions are appropriate here, it is important to recognise that Australia has a different corporate governance approach to the approach taken in the United States.
In Australia we have a practice of maintaining a fairly strict separation between the office of company chairman and the office of company managing director or CEO - a practice not followed to the same extent in the United States.
In addition, the US has a pronounced rules-based or black letter law approach to corporate governance regulation whereas Australia has a principles based approach. A third key difference is the continuous disclosure required in Australia - which can be contrasted to the periodic reporting requirements in the United States.
So while calls from some quarters for more corporate wrong-doers to be issued with striped pyjamas and lengthy prison terms may be excessive, there is a good case to take stock of our regulatory framework.
It is the role of the Government to ensure that the framework for regulation and the resolution of corporate failure are attuned to business practices and the needs of the community in Australia. We need to ensure that regulation encourages competition and growth and protects investors and market participants without stifling innovation or wealth creation. But this is not just an issue for Government, it is also an issue of enormous importance to the business community, the professions, and consumers.
We already have existing laws against fraud and illegal behaviour. It is important that those laws are enforced but it is equally important that we do not have a knee-jerk reaction and impose yet more layers of regulation that may not add much to what already exists.
CLERP in Australia
This Government has also been progressively modernising and improving elements of Australia's corporate governance framework. The Corporate Law Economic Reform Program (CLERP) has steadily modernised Australia's corporations law and given it an economic focus. The work is ongoing and market developments continue to focus the Government's attention on regulation that protects the legitimate interests of all market participants.
Although it would be inappropriate for me to comment directly on issues which may be under investigation, the recommendations of the HIH Royal Commission will no doubt provide further focus for corporate governance reforms.
Of course, there may also be lessons for other parts of the financial system and for corporate and prudential regulation.
The community's expectations of the safety of financial institutions are higher than those for other corporations. In the case of superannuation for example, an issue in my portfolio, there is a very clear expectation that superannuation funds into which compulsory contributions are deposited should be safer than other non-superannuation investments.
In continuing the CLERP process, the Government will shortly release a policy proposal paper (CLERP 9) which will address the recommendations of the Ramsay Report on Independence of Australian Company Auditors and a number of other issues on financial disclosure.
Accounting standards
While the CLERP program has already seen significant reform in the accounting standards setting process, the Government is committed to ensuring Australia continues to have a world's best practice regulatory and disclosure framework.
The Financial Reporting Council's announcement on 3 July of its support for the adoption by Australia of International Accounting Standards by 1 January 2005 marked a significant milestone for the development of financial reporting in this country.
In a globalised economy with large and growing international capital movements, a single set of high quality accounting standards will facilitate cross-border comparisons by investors, and reduce the cost of capital by reducing risk premiums associated with information asymmetry.
United States accounting standards
As we know, the United States has yet to commit to the adoption of IASB standards for domestic use, although I understand that efforts are being made to achieve greater convergence of IASB and US standards. We welcome those efforts.
It is hoped that the adoption by the European Union of IASB standards from 2005 as part of its single market objective will lead the United States to at least accept IASB standards for cross-border purposes - as recommended by the International Organisation of Securities Commissions at their meeting here in Sydney 2 years ago.
Another area demonstrating the Governments impressive track record in legislative reform to assure ongoing business investment is the recent regulatory reform to Australia's financial services sector. It is now more responsive to the needs of both business and retail consumers.
The Financial Services Reform Act, or FSR, will give Australia a world-class regulatory regime in the financial services sector. The scope of the reforms will benefit both the Australian financial services industry and its customers. They will help ensure that we continue to grow a vibrant, flexible and adaptable financial services industry - an industry that is not hampered by confusing or inconsistent regulatory approaches.
In framing the reforms, the Government believed that one of the best ways that our financial markets can grow and reach their full potential is to ensure that consumers are fully aware and informed in relation to the decisions that they are making. The new financial services reforms do just that.
It is important to strike the right balance between the Government legislating various rules or requiring certain disclosures by financial services providers and allowing consumers to make up their own minds. I think we've got the balance about right. To put it simply, a market with informed participants is the best mechanism for delivering a high growth, high-performance financial sector.
I would like to turn now to the significant business tax initiatives and indirect tax reforms that underpin Australia's strong economic performance and lay a firm foundation for inbound and domestic investment.
TAXATION REFORM - BUSINESS, INDIRECT AND INTERNATIONAL
Substantive Tax Reforms to DateOver the past three years, this Government has been engaged in one of the most substantial reforms to the Australian tax system on record.
- We've cut the company tax rate from 36 to an internationally competitive 30 per cent;
- We've replaced the arbitrary wholesales sales tax system with the GST, which has broadened the indirect tax base and made exports tax free;
- We've removed financial institutions duty and stamp duty on most share transactions;
- We've implemented the Uniform Capital Allowance Regime which has simplified the tax law by streamlining the tax treatment of depreciating assets and recognised a number of black-hole expenditures;
- We've (recently) introduced statutory effective life caps for a number of major assets in large and economically significant industries, including LNG, gas transmission and distribution, oil and gas production, and aircraft. This measure is directed at ensuring these industries remain internationally competitive and that Australia's depreciation regime does not discourage investment in large infrastructure assets;
- We've implemented capital gains tax scrip-for-scrip relief on mergers, and tax relief for demergers, to increase efficiency by allowing greater flexibility in restructuring businesses; and
- We've halved the capital gains tax for individual investors and trusts. And for superannuation funds, one third of the gain is now exempt from capital gains tax.
More recently, legislation to introduce a consolidation regime was passed by the Parliament in June. Further legislation to support the consolidation regime will be introduced in the Spring sittings. Consolidation will improve commercial flexibility, reduce compliance costs and structurally address integrity issues arising from the current tax treatment of corporate groups.
Further Business and International Tax Reforms
This Government remains committed to maintaining the momentum of business tax reform and building on the far-reaching reforms already in place.
- We are continuing to redesign the taxation of financial arrangements to remove anomalies, distortions and gaps in existing laws, facilitate desirable financial innovation, improve risk management and enhance the efficient operation and competitiveness of Australia's business sector.
- We are improving provisions relating to tax exempt leasing and effective life depreciation of building and structures.
- A key priority is my committment to having the Office of Inspector-General of Taxation established and operational by the end of the year. The Inspector-General will provide a new source of independent advice to Government on systemic problems arising in tax administration, with a view to remedying those problems quickly. The Inspector-General will work closely with other advisory and review bodies to enhance the operation of the tax system.
The Government has also been progressing tax issues on the international front.
Tax Treaties
As part of our undertaking to revise Australia's tax treaties with major trading partners, we recently signed a protocol to amend the Australia-US treaty.
The amendments will remove withholding tax on most non-portfolio dividends flowing from US subsidiaries to Australian parent companies, halve the withholding tax rate on royalties from 10 per cent to 5 per cent, and exempt from withholding tax interest paid to financial institutions and government bodies.
These amendments will benefit many Australian companies operating in the world's largest economy, not to mention many members of this Chamber directly.
This Protocol is a major step in making possible a competitive and modern tax treaty network and will significantly aid trade and investment flows between the two countries. Treaty discussions are also progressing with the UK.
Other International Tax Initiatives
Other international tax initiatives include the planned introduction of legislation in the Spring sitting of Parliament to provide venture capital limited partnerships with flow-through taxation treatment. This builds on the Government's previous decision to provide an exemption for capital gains on venture capital investments made by non-resident pension funds from certain countries, including the US.
We also recently introduced legislation into Parliament to change the taxation of expatriates to remove impediments and assist business in attracting highly skilled workers from around the world. These impediments relate to the tax treatment of foreign source income and the foreign investment fund rules in respect of expatriates.
It was disappointing that this legislation encountered difficulties in the Senate but the Government remains committed to progressing these changes to expatriate taxation.
The Government is also seeking to address concerns relating to the CGT treatment of departing residents, including expatriates, on a country by country basis through renegotiation of double tax agreements. The recently signed US protocol included provisions to address these concerns and the issue has been raised in all our current treaty negotiations.
The Review of International Tax Arrangements
Last, but not least, the Government undertook to review Australia's international tax arrangements with the primary goal of making Australia a more internationally competitive place to do business and to attract investment.
The Treasurer announced further details on 2 May 2002, stating that the review would consider at least four principal areas, namely:
- the dividend imputation system's treatment of foreign source income;
- the foreign source income rules (principally comprising the controlled foreign company, foreign investment fund and the foreign tax credit/exemption rules);
- the overall treatment of `conduit' income (foreign source income flowing through an Australian entity to non-resident investors); and
- high level aspects of tax treaty policy and processes.
The taxation treatment of foreign expatriates is also an important issue for consideration.
The Board of Taxation will undertake public consultations on these issues and is due to report to the Government by the end of the year. A consultation paper prepared by Treasury will outline a number of potential options and serve as a basis for these consultations. I encourage the Chamber to actively participate in those consultations, and am sure the Board will seek to take into account all views expressed.
Conclusion
It is not overstating it to say that the Howard Government has put in place economic settings that have allowed Australia to reshape our economy.
But there are always new frontiers. Both Australia and the US are now engaged in debate about global ageing and declining fertility. These debates have a long way to go and will no doubt require our respective tax systems to be ever more responsive to meet emerging needs and new policy goals.
The tax system is the heartbeat of the economy and I am confident that our ongoing reforms will equip us to meet our future challenges not only for business but for the community generally.