11 November 1999

Address to the Financial Planning Association Annual Convention Centre

Thank you:

Wesley McMaster, retiring chair, FPA
Raymond Griffin, new chair, FPA
Harold Evensky, Chair, International CFP Council
Jillian Segal, Commissioner, ASIC
FPA Directors
Kevin Wyld, Convention Chair
Michael McKenna, Chief Executive, FPA
FPA members, international delegates
Ladies and gentlemen

I am very pleased to be here today and to participate in the opening ceremony for the FPA’s 8th Annual Convention. It is a marvellous occasion, which I understand is the largest annual convention held in Australia.

Events such as this are a good time to reflect on what has been achieved over the past twelve months or so and to look forward to the opportunities and challenges that may await us in the coming year.

You are in a dynamic industry and much has occurred over the past year or so. Wesley has mentioned some of the achievements of the FPA under his stewardship as Chairman of Directors for the past two years. And it is an impressive record.

And one aspect I would like to acknowledge at the outset is the constructive contribution that the FPA has made to policy development in Australia. On behalf of the Government I would like to thank you for this contribution.

I want to reflect a little on what has happened to the Australian economy over the past year or so, and a great deal has happened, but more importantly, to look ahead and contemplate what may be in store for us.

Before doing so, it is worth reflecting briefly on some of the reasons for the explosion in consumer demand for financial planning services and the implication of this for the economy.

Put simply, the rapidly growing demand for financial planners and advisers comes from some of the fundamental changes that are occurring in the Australian economy, and in particular, the rapidly growing financial sophistication of Australian consumers.

This is in part a result of the transformation in the Australian financial system and the increase in the range of products and services that are available to consumers. One of the driving forces behind this has been Government policy aimed at increasing competition in the financial sector and making it more responsive to the needs of consumers.

The evidence of the increased financial sophistication of the Australian community is no more evident than the increase in the proportion of Australians owning shares. With the US, we are the largest shareholding nation in the world. Over 43 per cent of adult Australians own shares either directly or indirectly through superannuation or managed fund investments.

This growth has been assisted by the 400,000 Australians who purchased shares for the first time through the Telstra 2 share offer and the 560,000 new investors who were introduced to the sharemarket through the Telstra 1 share offer. With Telstra 3, we will in due course clearly become the biggest share holding nation in the world. Even now, more Australians own shares than are members of trade unions.

What does all this mean?

As more Australians are increasingly aware of the range of financial products and services that are available, as their wealth increases, as they become aware of the benefits of saving and investing and the opportunities that are available, there is a growing demand for financial advice. As financial planners, you play an important role in advising people of the range of financial products and services available so that they can make informed decisions.

It also means that Australia must have a tax system that is appropriate to the needs of a shareholding/saving/investing nation, and this is something I will come back to.

But let me make a very broad observation of the implications of this development. With a growing proportion of the Australian population

  • having a direct interest in the outcome of corporate decisions;
  • being concerned whether companies are using their assets as efficiently as possible;
  • recognising the importance of economic policy settings and the impact this will have on the return they receive from their investments; and,
  • realising that they should manage their money as efficiently as possible and should plan for their future;

this can only lead to overall improvement in the performance of the Australian economy.

We have, in effect, more and more people focussed on ensuring that the resources of our nation are used as efficiently as possible - to use the jargon of the economists, that we have efficient resource allocation and we are using our assets as productively as possible. This will lead to stronger growth, rising incomes, more jobs and a higher standard of living.

And this is exactly the environment the Government is promoting through policy reforms aimed at encouraging a financial sector which is innovative, dynamic, and operating in a supportive and sustainable economic environment with informed consumers becoming increasingly involved.

I mentioned that this was an appropriate occasion to reflect on what the Australian economy had achieved in recent years. And it has achieved a great deal;

  • strong economic growth - 5.1 per cent in calendar 1998, 4 1/2 per cent in 1998-99;
  • low inflation - averaging 1 per cent over the past three years;
  • half a million new jobs created in the past three years;
  • an unemployment rate around its lowest in a decade;
  • mortgage interest rates at historical lows; and
  • a $24 billion reduction in Government net debt in three years.

And all this has been achieved when most of the countries in our region have experienced the most severe economic crisis in thirty years and have been in recession.

We achieved this remarkable economic performance because of the policy reforms we had put in place - returning the budget to surplus, reforming our labour market, reducing trade and foreign investment barriers, locking in low inflation, giving the Reserve Bank enhanced independence, reforming our corporate laws, enhancing competition policy, reforming the financial system, and privatising government business enterprises.

As financial planners, you know the importance of having a comprehensive and integrated approach to planning for the future and the benefits that can come from having such an approach, the benefits that can come from hard work. Well this is what we have seen in terms of economic policy.

We have done the hard work, we have planned for the future, and we are seeing the benefit of this hard work and planning in the strong performance of the Australian economy.

But our focus should not be on what we have achieved, but on what we can achieve. I believe Australia has a wonderful opportunity over the next decade. Just as we have benefited from the policy reforms that we put in place in the past, we will build on these and benefit in the future from the reforms we are implementing today. I will briefly comment on two of these, namely tax and our Corporate Law Economic Reform Program (CLERP) - in particular CLERP6.

But before doing so, I will make a few more specific remarks about the economic outlook.

I will be releasing the Mid Year Economic and Fiscal Outlook in the coming weeks and this will contain revised forecasts for this financial year and preliminary forecasts for 2000-01.

The Australian economy is expected to "slow" to a growth rate in the threes in 1999-2000 - a very impressive performance compared with other countries. But one thing that we have seen since Budget time is a significant improvement in the international economic environment. This was the reason the Reserve Bank increased official interest rates by of a percent on 3 November. Since then we have seen the European Central Bank and the Bank of England increase interest rates as well.

When the RBA last cut official rates in December 1998, world growth was expected to be weak and international interest rates were declining. As things turned out, world growth in 1999 turned out to be a good deal stronger than was expected and world interest rates are rising. Recoveries in Japan, Europe and many of the Asian economies are strengthening, and strong US growth is continuing.

In particular, the Asian economies have recovered significantly faster than was expected. Last December, the forecast was for hardly any growth in the Korean economy in 1999, and growth was expected to decline in Singapore, Malaysia and Thailand.

(These economies all contracted in 1998). Our latest assessment is that Korea grew by 9 per cent in 1999, with Singapore and Malaysia growing by 6 per cent and Thailand by 3 per cent. Admittedly this is growth from a lower base as a result of recession. But it is growth and strong growth.

The small increase in interest rates that we have seen in Australia is a preemptive move in response to the stronger international environment and is designed to ensure that strong growth and low inflation is maintained for years to come.

And the maintenance of low inflation is one of the major achievements of recent years. Over the past three years inflation has averaged well below 2 per cent. This has been the result of establishing a credible and transparent framework for the operation of monetary policy, including giving the Reserve Bank independence, as well as promoting strong competitive pressures, rapid growth in productivity and moderate wages growth.

Inflation is expected to rise a little during 1999-2000, but still be well within the Reserve Bank’s target range of 2-3 per cent

In 2000-01, we will see a one-off impact on prices from the reform of indirect taxes, including the introduction of the GST from 1 July 2000. Leaving aside the impact of the change in indirect taxes, inflation is expected to be around 2 per cent, again well within our inflation target. The slight pick up in core inflation is in part the result of rising commodity prices which will lift production costs in Australia and overseas.

The first thing to note about the impact of indirect tax changes is that it will not fall evenly on prices in one year. The main one-off rise in the price level will occur in the September quarter 2000 following the introduction of the GST. However, in the following quarters of 2000-01, we will see a downward influence on prices coming from the removal of embedded wholesale sales taxes.

(In fact we have already had downward influence from the reduction in WST rates of 32 per cent on 29 July 1999)

In terms of the likely impact on prices solely from the change in indirect taxes yet to take place, the estimate is that the first year effect will increase the CPI by around 2 - per cent through the year to the June quarter 2001. With ongoing inflation of around 2 per cent, the total increase in the CPI, including the changes to indirect taxes, is expected to be around 5 per cent through the year to the June quarter 2001.

But the longer-term impact of the changes to indirect taxes on the CPI will be less than the first year impact in 2000-01. This is because further indirect tax changes introduced in 2001 and beyond will reduce the overall CPI impact of the package. These include the removal of FID and stamp duties on marketable securities from July 2001, the phasing in of input tax credits for motor vehicles and the subsequent abolition of indirect taxes like BAD. If tobacco is excluded, in the longer term the overall effect of the indirect tax reforms on the CPI is expected to be around 1 - per cent.

But the key point is that the impact of the tax reform changes on the CPI is a one-off, it does not represent a lift in ongoing inflation. Monetary policy is directed at ongoing inflation and for this reason the RBA has said that in the setting of monetary policy it will look through the first round effects of the GST on prices.

The introduction of the GST would only have a lasting impact on inflation only if there were a flow on effect, for example if higher wages were sought because of the one-off lift in prices. But there is no reason to make such claims. Income tax cuts of around $12 billion and other compensation measures will more than adequately compensate workers and consumers for the rise in prices. All taxpayers will receive a tax cut and almost 90 per cent of taxpayers will face lower marginal tax rates. In addition, over 80 per cent of taxpayers will face a marginal tax rate of 30 per cent.

Even after tax induced price rises, tax induced increases in take home pay mean that employees are better off. This means there is no need or legitamate claim for second round wage increases.

Another important feature of the new tax system is the package for families. Families are major beneficiaries, with over 2 million families sharing in increased benefits of about $2.5 billion a year. Combined with personal tax cuts and the private health insurance rebate/benefit, low and middle income families, in particular, will keep a higher proportion of the after tax earnings they receive.

The Government will also be increasing all pensions and allowances by 4 per cent from 1 July 2000. The 4 per cent increase is made up of a guaranteed 2 per cent real increase as well as a 2 per cent component that represents an advance on future CPI increases. As well, the Government has legislated to ensure that base pensions will continue to be at least 25 per cent of Male Total Average Weekly Earnings.

So wage earners, families, and pensioners will be better off under the new tax system – after price rises.

At the end of the day, after tax cuts, the GST, and the abolition of existing indirect taxes, the community will be paying less tax. It is amazing that some are questioning whether the tax cuts associated with the introduction of the new tax system are appropriate.

This Government believes in lower taxes. It believes in giving people greater incentives to work, to invest and to save. The tax cuts are part of an historic reform of Australia’s taxation system. They will ensure that the new tax system is bedded down without any long-term impact on inflation, and without any adverse impact on equity. The reform of Australia’s tax system is not a short-term policy measure but a long overdue structural reform that will benefit all Australian’s for generations to come.

The FPA is a strong advocate of the need for a long-term retirement income strategy. It sees merit in an inquiry on retirement income after the Government has implemented its present round of tax reform. What should be recognised is that the tax reform initiatives we are introducing are a key component towards giving people the capacity and the incentive to prepare for retirement as well as giving governments a robust revenue base in order to fund future social services. Before embarking on any future inquires, we need to implement the measures which, as I mentioned earlier, will give people the incentive to save and invest.

This brings me to the business tax reforms we are in the process of introducing into Parliament. I mentioned earlier that the policy reforms we implement today will secure us sustained growth and rising incomes in the years ahead. And this is no more evident than in the case of modernising our business tax system. The objective is to reduce the company tax rate to internationally competitive levels, to lower capital gains tax, to remove tax distortions, to reduce the dead hand of compliance costs - particularly for small businesses, to provide greater incentives for venture capital, and to improve the integrity of the business tax system.

It is a comprehensive program, but I will just say a few words about the importance of reforming the arrangements for taxing capital gains. As I mentioned earlier, Australia needs a tax system that recognises that we are now a nation of shareholders.

Let me refer to some comments that have been made about Australia’s existing capital gains tax (CGT) arrangements;

‘There are a number of problems, relating to the current CGT in Australia, which inhibit the competitiveness of the Australian economy.

  • CGT encourages companies to finance investment with debt, (which is tax deductible), rather than with retained earnings or new equity.
  • The CGT increases the cost of liquidation, which discourages efficient trades.
  • The current CGT is unfair to small business….
  • A high CGT discourages Australians to hold capital gains assets….
  • The present CGT handicaps ‘start-up’ companies.
  • A high CGT reduces the incentive to become an entrepreneur.’

Who made these comments? They come from an organisation with over 10,000 members across Australia who are managing the financial affairs of over 3.7 million Australians. They come from the Financial Planning Association of Australia’s submission to the Senate Inquiry on Business Tax Reform.

I do not have to convince you of the importance of reducing capital gains tax and of business tax reform more generally. While I could quote extensively from your submission, I know I am preaching to the converted. But let me endorse one last comment from your submission, namely;

‘The (Government’s) Response to the Ralph report continues the necessary reforms needed to enable all Australians to benefit from a sound, growing economy.

This is why the FPA believes the package should be passed by Parliament’

The package should be passed by Parliament.

There is one other area of our financial reform initiatives which I would briefly comment on, and is one which is of particular interest to FPA members, namely CLERP 6.

I am very pleased that the first CLERP legislative package has passed the Senate and will take effect as of 13 March 2000. This legislation will, among other things, improve fundraising for all Australian business, particularly small and medium enterprises.

It will facilitate raising investment capital and reduce fundraising costs. In addition, consumer protection will increase and directors and shareholders will have greater certainty through the introduction of a ‘safe harbour’ defence and a statutory action.

It has been a long journey for the CLERP legislation, but a worthwhile one. Many organisations, including the FPA, made an important contribution. Others were not so constructive. Labor took every opportunity to slow down the passage of the necessary reforms. They obstructed, delayed and denied. But they did not prevail.

As for CLERP 6, as you know at the heart of this initiative is the development of a single licensing, conduct and disclosure regime. It will cover all financial service providers who offer general insurance, life insurance, superannuation, securities, derivatives and banking products.

CLERP 6 will build a regulatory regime that encourages the financial services industry to innovate, to embrace the opportunities provided by technology and the globalisation of financial markets and to cater to changing consumer needs.

At the same time, the regulatory regime must create an environment in which consumers have confidence by ensuring that there are appropriate levels of consumer protection.

This combination of an innovative, flexible industry and an informed, competent consumers will lead to increased market participation and all the benefits of this which I outlined earlier.

Since the CLERP 6 consultation paper was released in March this year, over 120 submissions have been received and consultations have been held with more than 400 individuals. One of the keenest contributors to the CLERP 6consultations process has been the FPA.

In terms of the way forward, draft legislation is being prepared and will be released later this year.

This will be followed by a three month public consultation period. I know that there are still some concerns over certain parts of the proposal, including disclosure requirements.

The Government is committed to ensuring that consumers are protected and this includes ensuring that consumers are well informed. So I welcome further consultation on the disclosure requirements.

The aim is to have CLERP 6 in place by 1 January 2001. Of course putting a Bill into parliament is one thing. Having it passed is another. For instance, our Bill on choice of superannuation funds has been before the Parliament for 23 months and counting.

But I hope the Opposition has learnt from the experience of the first CLERP Bill and recognises the importance of these reforms to Australian savers and investors.

In conclusion, what of 2000 and beyond. Will it be as suggested in the theme for your Conference, the ‘Gateway to the future’? I believe it will be.

Why? Because we are putting in the hard work now which will give us the dividends in the future. We are taking the policy measures necessary to strengthen the Australian economy, to lift its competitiveness, to create jobs, to reward hard work, to provide greater incentives, and importantly, to provide hope for all Australians.

As I have already mentioned, as financial advisers and planners, you have an important role to play, as does the FPA, which is making a major contribution in promoting policy reforms.

And it is with this sense of optimism that I am delighted to officially open the FPA’s 8th Annual Convention and wish you all the best, not only for your discussions over the next few days, but for 2000 and beyond, the gateway for the future.