Address to the Investment and Financial Services Association 1999 National Conference Gala Dinner

Ladies and Gentleman

I am delighted to have the opportunity to address the 1999 National Gala Conference Dinner of the Investment and Financial Services Association.

It is some 18 months or so since IFSA was formed but it has achieved a great deal in that relatively short period, I would like to record my appreciation of the contribution that IFSA has made to policy development in the financial sector.

But a great deal of change has also taken place within the Australian economy over the past few years. And this is what I would like to reflect on this evening – not to dwell on the past – but to review the developments that will determine our future. As I said in this year’s Budget speech: "The next decade could be a special one for Australia".

Australia is recognised as the stand-out economy of the Asian economic and financial crisis. As the Wall Street Journal noted in April this year: "Australia hasn’t just avoided the Asian-Pacific downturn; it has roared ahead". "After a decade of unflattering comparisons to Asia’s once booming economies, Australia now is basking in praise from the most unlikely sources….".

We have an economy that is leading the developed world in growth—4.8 per cent in the year to the March quarter 1999. Growth has exceeded 1 per cent or more for the past 6 quarters; this is the first time that this has been achieved in this country.

Our employment growth is strong, with 470,000 new jobs created since the Government came into Office. The unemployment rate---at 7.2 per cent---- is still too high but it is the lowest rate in over nine years.

This strong growth has been accompanied by low inflation—1.2 per cent in the year to the March quarter 1999. Continued low inflation means not only low interest rates but a stable interest rate environment---something that has been a distinguishing feature of the Australian economy in the past few years.

A combination of sustained, strong economic growth and low inflation is the goal of all economies, for this is the key to rising real incomes and improved living standards.

One of the truly remarkable changes to the Australian economy in recent years has been the lift in our productivity growth. Over the past four years our productivity growth has averaged 2.9 per cent. This compares with average growth of only 0.7 per cent over the 1980’s.

Our public finances are now in good shape. The last 3 Budgets I have delivered have been in surplus with further surpluses in prospect. The Government has not borrowed, in net terms, since coming into office. In fact, the Government has repaid debt every year it has been in office since 1996.

It is a long time since Australia has experienced the type of economic performance we now have. The cover of last week’s Business Review Weekly entitled, "The super-charged economy" posed the question. "What is fuelling Australia’s glory days?" Sentiment has changed dramatically. This time twelve months ago the Australian Financial Review proclaimed almost on a daily basis that we would soon be swamped by the crisis that was sweeping Asia and the majority of private sector economists were forecasting very weak growth in 1998-99, with some predicting a recession. Rather than a recession, we are looking at growth well in excess of 4 per cent.

The Asian financial crisis broke in Thailand in August 1997 nearly 2 years ago. Can we draw any conclusions from the events since?

I would like to draw one tonight. It is about the importance of policy. Policy is important. Policy counts. Policy can make a difference.

It has been a long time since Australia had such a coherent and targeted policy framework in place.

Over the last 3 years the Government had clear aims:

• putting the Budget in surplus;
• introducing a medium term objective for fiscal policy;
• locking in accountablility and transparency in fiscal policy with the Charter of Budget Honesty;
• re-enforcing the independence of the Reserve Bank with the statement on the Conduct of Monetary Policy;
• increasing competitive disciplines through ongoing Competition policy reforms and privatisation;
• accelerating the move from centralised wage fixing to enterprise bargaining and improving labour market programs; and
• introducing a major package of reforms to the financial sector which have ensured sound corporate governance and prudential supervision. I will say a little more on this point shortly.

Commentators also perhaps failed to appreciate the resolve of the Coalition Government to pursue such a comprehensive and ambitious package of policy reforms—a package that involved not only doing the easy things but also the hard things. And what we have seen is that strong, sustainable economic and employment growth depends on having all the policy elements in place---not only the easy things but also the hard things.

One of the lessons from the Asian crisis was that appropriate policy in one or two areas alone is not sufficient for the maintenance of economic growth and stability. For example, many of the Asian economies appeared to be in good macroeconomic shape, with low inflation and high savings.

But they suffered because they failed to take the structural reform agenda far enough and they failed, among other things, to establish efficient ,well-managed regulatory institutions.

Just as the experiences in Asia demonstrated the consequences of shortcomings in economic policy, the experience of Australia has demonstrated the benefits of having a sound, comprehensive economic policy framework in place.

But this is also the point which distinguishes the Australian economy of today from that of the 1960s. Some are comparing our current economic performance with the golden age of the 1960s. But the golden age of the 60s came to an abrupt end in the 1970s when the economy was hit with the oil price shocks and some disastrous economic management under Whitlam Labor. Australia experienced a relatively benign international environment in the 1960s, but it also had an inflexible economy which could not respond to the international shocks which it experienced in the 1970s and beyond.

The Australian economy of today is different. It is a far more competitive and flexible. It is capable of responding to international shocks. It not only weathered the Asian crisis, but as I noted at the outset, proved to be the stand-out economy in the fury of the crisis.

This is the highly favourable economic background in which IFSA members are operating. It is the economic foundation which gives Australia the opportunity to be a major center for financial services.

Let me turn to some specific developments in the financial sector.

As I noted previously, the crisis in Asia underlined the importance of institutions:- of sound corporate governance and prudential supervision. The soundness of Australia’s financial system has been one of the key ingredients in our ability to maintain a high level of business and investor confidence. But we would not have maintained this stability and confidence if the Government had not embarked on its extensive program of reforms – reforms which started well prior to the Asian crisis.

IFSA members would be well aware of the major package of reforms implemented following the Wallis Inquiry and the reforms to be implemented as part of the Corporate Law Economic Reform (CLERP). But I think we do forget how extensive these reforms are. They include:

Wallis

• a new regulatory structure for the financial system based on the RBA, APRA and ASIC.
• bringing all deposit takers within the regulatory oversight of APRA.
• broadening access to the payments clearing and settlement systems, including by allowing non-banks to have access to exchange settlement accounts.
• facilitating new corporate forms and structures – such as non-operating holding companies – to enhance competition and efficiency in financial markets.
• introducing legislation to provide a sound legal basis for market netting and Real Time Gross Settlement.
• removing non callable deposits.
• establishing the Financial Sector Advisory Council to provide ongoing advice on financial sector developments and policies.

CLERP

• changing the fundraising rules to make access to capital easier for small business.
• providing a greater commercial and international focus to the making of accounting standards.
• introducing a new business judgement rule to provide more certainty for directors and new shareholders’ rights to take action on behalf of companies.
• improving takeovers regulation to promote a more competitive market for corporate control.
• harmonising regulation of all financial products, introducing a single licensing framework for financial service providers, introducing minimum standards of conduct for financial service providers.

It would take a considerable time to complete a list of the financial sector reforms that have been introduced or which we are in the process of introducing. But I think I have demonstrated my point. The last 3 years have seen an astonishingly extensive reform process.

The Government has also been very conscious of the need to get the balance of reforms right---to ensure that they truly deliver the benefits that our citizens need. This has required extensive consultation with industry and consumer groups to ensure that the reforms appropriately balance the needs and interest of all parties. IFSA has been closely involved in this process. Many of you are involved in investing savings. Let me come directly to this question of savings.

Australia needs to improve its national saving performance.

The central element in the Government’s strategy to improve national saving has been its medium-term fiscal strategy. Returning the Commonwealth Budget to surplus has significantly improved public saving in recent years. Our primary fiscal goal is to ensure that the Commonwealth does not, on average, call on private saving to fund its activities over the medium term.

It is particularly important that we take advantage of the current strong economic performance to maintain substantial fiscal surpluses and, with the full sale of Telstra, we can completely eliminate net Commonwealth debt. We have the opportunity to enter the next century just as we entered this one as a new nation— free of public sector debt.

I would mention that while it is the Government’s intention to drastically reduce net Commonwealth debt, the Government will maintain a sufficient gross issuance of Commonwealth bonds to maintain the liquidity of the market and to assist in pricing.

We have seen a trend decline in the household saving ratio over the past 20 years or so. However in making consumption and saving decisions households not only take into account their current income but also their wealth.

The household saving ratio understates the financial position of households because while rising asset prices tend to boost consumption growth, the increase in household wealth is not recorded as income in the household income account.

Indeed the combined balance sheet of Australian households is in good shape, a position which has been reinforced by the recent spate of successful privitisations and demutualisations. We are creating a shareholder democracy and in the process we are increasing householder wealth.

Does this mean that private consumption is more exposed to any development which adversely impacts on the wealth of the household sector? I think what it means is what has always been the case:- the economy is always vulnerable to poor economic management. What consumers and investors need is a stable economic environment and this must be the ongoing focus of macroeconomic management.

One of our on going challenges is to lift private saving. On this point, part of the advantages of reducing income tax and introducing a consumption tax is that we will give Australians greater incentive to work and to save. This is the big macro-economic point of tax reform.

Our retirement income system is in good shape, but there is a need for improvement in some aspects, such as allowing individuals to be able to choose their superannuation fund.

I welcome the formation by IFSA of a Retirement Incomes and Long term Savings Task Force and I look forward to receiving representations from IFSA later this year when the task force advances its work.

This brings me to the key point of the ongoing challenge of reform.

While the Australian economy may be performing better than it has for many decades, now is not the time to rest on our laurels. The strong growth we are seeing today is a result of the hard work over past years and the reforms we are now undertaking will pay dividends in an even stronger economy in the years ahead.

We can further enhance our economic performance through continuing reform. For example, it is very limited thinking to say that because the Australian economy is performing well under our antiquated taxation system, there is therefore no need to introduce a tax system more suited for the 21st century than the 1930s—which is currently the case.

We can now look forward to the benefits that will come from a new modern taxation system, one that:

• lifts the tax burden from exporters.
• substantially reduces business costs.
• reduces income taxes and provides greater incentives to work and save, and;
• gives the States and Territories a growing source of revenue to fund social and community services.

And echoing the spirit of partnership with the private sector in implementing reform which I referred to earlier, the Government is establishing a Board for A New Tax System which will facilitate direct private sector input into the implementation of the GST and other aspects of tax reform. I will be announcing the membership of this Board and providing further details on its operations tomorrow.

Australia will reap the benefits of the landmark reform of our tax system which recently became law.

Similarly, we need to push on with ensuring that we have a business tax system that provides Australia with the competitive framework necessary to promote growth and investment. And this is the focus of the Ralph Review which will report to the Government on 30 July.

The Government has specifically given the Ralph Review the task of seeing how, in a revenue neutral manner, we can modernize business taxation.

But the Ralph Review has not been given a mandate to design a tax system which favours one industry sector over another. The fundamental objective of the Government’s reform program is to develop a tax system that optimises the overall growth of the Australian economy, promotes efficiency, and ultimately enhances living standards for all Australians.

And these objectives will be achieved through a tax system which reduces business costs, encourages investment and innovation and enhances the economy’s international competitiveness.

I believe that this can be achieved not only by reducing tax rates but having a tax system that promotes greater simplicity and certainty.

Reducing the company tax rate would give Australia an advantage against our competitors for international capital and as such would have a positive effect on economic growth. Similarly, we should look to creating advantage for Australia in obtaining investment, particularly in innovative, high growth companies when we review capital gains tax.

The objective is not to design a tax system for one industry sector over another. It is to secure overall national advantage. We shall bear in mind the demands and circumstances facing sectors that have long been engines for growth but always look to establish new engines of growth for the future.

An example of the Government’s responsiveness to the circumstances facing particular sectors, and one that is particularly relevant to IFSA members, is the decision earlier this year for investments through ‘Collective Investment Vehicles’ (CIVs) to be taxed on a flow-through basis rather than taxing the CIVs as an entity. To do otherwise would put CIVs at a competitive disadvantage, and disadvantage smaller investors.

In a similar vein, I can assure you that in our consideration of business tax changes the Government will continue to be very mindful of the important role that the superannuation industry plays in promoting savings and contributing to our retirement income system. A key factor underlying the Government’s consideration of the Ralph Review will be the objective of promoting saving.

Our review of business tax is an exciting prospect. Australia is already recognised as the stand out economy of the recent economic financial crisis.

We have the opportunity to build on our strengths and further enhance our economic performance. We have the opportunity to be a centre for global financial services.

We must take full advantage of this opportunity and to take advantage of these opportunities we should never forget the importance of policy – good policy – to shape the future. The reform of today will bear the fruit of 5,10 and 20 years time.