The members of the MTIA, to my ministerial colleagues, members of the Labor Party. I dont know if there are any Democrats here, I was a little late I had my office phone them all and make sure they were all still Democrats this evening. But to all of my parliamentary colleagues welcome to this event.
Todays the 10th anniversary of the great stock market crash of the 20th of October 1987. Following a fall on Wall Street on the Monday the 19th of October, the Australian market fell 10 years ago by 25 per cent, wiping $55 billion off the value of market capitalisation.
Policy makers decided it was time to loosen liquidity and monetary policy was eased, lest the stock market crash flow into the real economy. In fact a real economy continued to boom with asset inflation moving into other areas.
And as the economy overheated, from early 1988 interest rates were gradually raised until they reached 18 per cent in 1989. The stock market crash may not have had an effect on the real economy but run away inflation and run away current account deficits and the monetary response most certainly did. By early 1990 the business overdraft rate was over 21per cent. We were in the beginning of recession. The then Labor Treasurer Keating said 'the recession we had to have'.
I begin the story with the stock market tonight because it is the 10th anniversary. But what happened on the stock market really is not part of this story. The point is that spiralling inflation and run away current account deficits ended in a severe recession. The 1990-91 recession cost Australia 300,000 jobs and it was 4 years before employment was returned to the level that it was previously. That recession wiped billions off our national income and when we went into recession Commonwealth debt stood at $20 billion. After five Budgets accumulating $70 billion of deficit, our Commonwealth debt had quadrupled.
The point I want to make to you tonight is that macro-economic settings are still the principal determinant of business conditions, of job outcomes and of national incomes. And the kind of growth that is going to advance all of those outcomes is sustainable growth.
When the settings are strong, as they are now in Australia, its easy to take macro-economic settings for granted. But when theyre not, you know it. There is a lesson for us in the currency and stock market turmoil of our near neighbours. International sentiment can turn quickly. Those countries that are exposed on their current account deficits, or their fiscal settings, are at the whim of market sentiment.
And the first recommendation of the MTIA report 'Make or Break' makes this point: 'good macro-economic results - stable and low inflation, low interest rates, and a sound government position - are critical to fostering strong investment for two reasons: consistent policy setting and stable, stronger growth'.
Over the last 30 years through the booms and recessions, two speed limits to growth in Australia have been inflation and the current account deficit. The first is now under control. We are well on the path to dealing with the second. If we can deal with these problems, and we are well on the way to doing so, we can lift growth in the Australian economy. We should be able to sustain growth above the long term trend. We should aim to take growth through 4 per cent.
While trend GDP growth slowed following the interest rate increases in late 1994, it clearly bottomed by the September quarter last year and has been steadily gathering speed in the December, March and June quarters.
In seasonally adjusted terms, the economy has been looking even stronger recently, growing by 0.7 per cent in the March quarter and 1.2 per cent in the June quarter. In the US, where quarterly figures are annualised, this would be portrayed as equivalent to a 5 per cent annualised growth.
Housing approvals data in the National Accounts, showing an increase of more than 20 per cent over the past year, are a leading indicator pointing to stronger employment growth to come. And the relative strength of the Australian economy becomes clearer when we compare ourselves to other countries and not just developed countries. Whilst the IMF predicts US growth of 2.6 per cent in 1998 and European growth of 2.8 per cent and developed world growth of 2.7 per cent, the IMF forecast for Australia is 4.0 per cent. But our capacity for growth is greatly enhanced by the exceptional results in relation to inflation. We have managed to rekindle growth while the rate of CPI has dropped sharply, down from 5.1 per cent over the year to the December quarter 1996 to 0.3 per cent over the year to the June quarter 1997.
Whilst Australia experienced healthy growth prior to the 1990 recession, it was not accompanied by low inflation. In other words something has changed. For example, ten years ago, while consumer prices in Australia rose by 8.5 per cent, inflation in the major industrialised economies averaged only 2.8. For the major economies, the decade of the 1980s was one of moderating inflation, but for Australia it was a lost opportunity. We paid the price in the form of an unusually severe recession in 1990-91 after interest rates were raised to high levels to control inflationary imbalances. Our inflation performance is now one of the worlds best. We have not had conditions like this in Australia for 30 years. Anybody who has been in business in Australia with an experience limited to the last 30 years has not been in a business environment like this one. And that is taking some adjustment.
In 1996, for example, the year began with underlying inflation at 3.3 per cent but expectations higher at 4.2. By the final quarter of 1996, inflation had fallen to 2.1 per cent, and was set to fall further, but inflationary expectations had not changed. Wages were, like inflationary expectations, slow to moderate, recording a growth of 4.2 per cent in the March quarter , and 3.9 per cent in the December quarter. It is clear that inflationary expectations lagged outcomes. This meant that wage adjustments were not consonant with price increases. Inappropriate wage outcomes are reflected either in lower profits or less employment. The good news, however, is that recently there has also been a marked step-down in surveyed consumer inflation expectations. Consumers increasingly believe low inflation is here to stay. And the Government has decided to lock in low inflation with a new agreement with the Reserve Bank of Australia to endorse an inflation objective and to respect the independence of the Reserve in monetary settings. The policy approach will ensure we lock in the benefits of low inflation. And the sharp narrowing of bond rate yield spreads between the Australia and the US is evidence that the international community believes our credibility in relation to it. When our Government was elected the spread was 250 basis points, now its down around 30.
But let me make the point low inflation is not an objective in its own right. We are committed to low inflation because it assists to make sound business investment decisions. It underpins the creation of new and lasting employment opportunities. It does away with the lure of speculative investments. Low and steady inflation gives savers the confidence to make more long-term decisions. It provides clearer signals on the allocation of resources. And of course Australias inflation outlook has made room for the Reserve to reduce interest rates five times, each time by half a per cent, since mid 1996. The Governments strategy in locking in low inflation is to deal with one of the traditional speed limits to growth in the Australian economy.
But the reason why I am optimistic about our growth potential is that in addition to the inflation achievement, we have made great progress in a credible medium term deficit reduction strategy. We are now paying off debt. The Coalition has a fiscal policy that is the best guarantee to business against higher taxes. Its a budget which is in surplus. This is a Government which doesnt need more revenue because its outlays in 1998 will be less than its revenue projections. Measures taken in our last two Budgets provide for a return to surplus by 1998-99 and an improvement in the underlying balance of 3- per cent of GDP between 1995-96 and 2000-01. Our goal by the turn of this century is to halve the debt to GDP ratio from 20 per cent to 10 per cent.
Again when you engage in a massive fiscal turn around like that you want to be sure that you can lock in the benefits against future prolificacy. Our Charter of Budget Honesty is designed to discipline our Government or any future Government in relation to fiscal policy. You wouldnt want a fiscal policy turn around with all of the adjustment that that involves to be squandered by a Government in the future which wants to take the benefits without ensuring the policy is followed. And the Charter of Budget Honesty will lock in good fiscal policy for the long term.
Within our macro settings another positive indicator is investment. Private investment has risen sharply from the recession of the early 1990s and as a share of GDP is now at record levels. Business investment has been strong in recent years after growing by 16 per cent and 11 per cent in the previous two years, it rose another 16 per cent in 1996-97.
As a result private business investment as a share of GDP is estimated to have reached record levels in constant price terms, and forecast to rise further over 1997-98. In nominal terms private business investment as a share of GDP is now around its long-term average. And we expect it to continue to grow strongly over the next two years. But the recent improvements in the macro economic outlook for Australia have to be matched by improvements in relation to micro economic reform. Its important that as a country we keep marching onwards in ensuring that we have a better competitive environment for business. You know in your own businesses that you have to work at it year after year after year. And its the same for Governments.
Our work in relation to micro economic reform has included the Workplace Relations Act, which came into operation at the beginning of this year which will provide greater choice in the way work place agreements can be negotiated; which reduces the prescribed role of unions in the bargaining process, which simplifies existing labour market regulations, which has the potential through workplace agreements to free up working hours, rationalise allowances and include productivity related remuneration arrangements.
Its important that we keep working on the national electricity market and privatisation in relation to electricity, to get electricity costs down for business. Its important that we keep working on the national gas market, its important that we keep our privatisation agenda going. This Government is now engaged in the biggest privatisation program that Australia has ever seen in relation to one third of Telstra.
Weve seen it in relation to airports as well. But I want to draw out two big policy challenges in relation to micro economic reform which I believe have the ability to deliver real and lasting benefits in the business climate for Australia. The first is corporations law. We have commenced the Corporate Law Economic Reform Program, which is designed to turn the whole focus of corporations law away from legalism, away from extensive legalistic requirements and to get corporations law back to its principal economic focus.
The corporation was conceived of, as an engine for doing business, for creating investment, for creating jobs, for creating wealth to be shared by shareholders and employees. Weve lost sight of the corporation as a limited liability vehicle which is designed to promote investment and we want to get it back to that. Make no mistake, its important if you want to run a good business environment that shareholders feel confident to invest. But its also important that business directors have the confidence that they can make economic decisions without incurring potential liability that threatens their livelihood each time they go to make commercial decisions.
We have already announced three areas for reform and sought feed back from the business community in relation to accounting standards, in relation to fundraising and today in relation to directors duties. We propose further changes in relation to electronic commerce and futures and securities markets. Why, because a corporations law which is complicated, extensive, legalistic, focussing on liability is not a corporations law that should give our corporations the confidence to go out and invest.
These are big changes, these are very substantive changes that we have put out to the Australian business community and with their support we want to see Australia enter this area of international competition. Its as important as tax areas to make Australia a haven for good corporate practice and, whats more, credible low transactional costs corporate practice.
The other area where the Government has an ambitious reform agenda is in relation to the financial system. The financial system is the life blood of Australian business. Its no point in affecting official interest rates if you cant transmit the benefits of lower interest costs out to business. Our Government, through its response to the Wallis Committee, has put down a proposal to make the Australian financial system more competitive than ever before and more competitive because we want to deliver better services and lower costs to borrowers in this community - to borrowers in the community including Australian business.
I said earlier that official interest rates in this country had been reduced by 2 per cent, the home mortgage rate has been reduced by 4 per cent. Why, because 2 per cent has been shaved off margins as a result of increased competition. What we need in relation to the business sector is the kind of heightened competition we have seen in the home lending mortgage market. The opportunity for new entrants to come into that market and shave margins. The opportunity to pass on benefits to your businesses so that your business get the benefits of heightened competition.
And our financial system should be a much bigger, broader financial system with superannuation funds in the business of lending monies. With new entrants coming in, they may well be manufacturing companies, they may be telephone companies coming into the provisional of financial services, cross-overs through financial services and superannuation services, new non-bank financial deposit taking institutions, credit unions, building societies competing under the rubric of the one prudential regulator and taking the banks on and providing better services and better competition.
This is another area for international competition at a time where we see even in our own region an international focus on and financial institutions at a time when Australia can well become a safe haven in relation to the region. We ought to think about state of the art financial regulation in Australia and we are. Thats what the Wallis reforms are all about. Good economic, macro fundamentals backed up by low inflation, low interest rates and insistence on micro economic reform. A fiscal program which will secure Australias future.
But I am also well aware that while industry has no arguments with good economic fundamentals, many will say that manufacturing is tough, some say as tough as it has ever been. Many manufacturers will tell the story of how they bore the brunt of economic change and reform through the 80s and 90s. They went through reduced protection and increased competition but they didnt see reductions of the costs of their inputs. Many manufacturers will say they struggled to adjust to a changing economic environment to be thumped by a recession and some feel that they are still hanging on as survivors. Many in the manufacturing industry still feel that they are carrying an unfair burden and more needs to be done in the way of economic reform. I sympathise and agree because its true. All of it. The reason manufacturers feel they are doing it tough is because they are. The reason they feel more needs to be done is because it does and one of the reasons they feel they are carrying an unfair burden is because they are discriminated against by Australias tax system.
The manufacturing sector of the Australian economy has been forced by governments to carry the nations indirect tax system virtually on its own. That is just over 10 per cent of the governments revenues. Once this was not totally unfair, once manufactured goods represented the bulk of household purchasing and as a consequence it seemed only fair that it contribute the bulk of indirect tax collection. At that time goods represented a fairly broad base for a pay as you spend tax. But while that was true in 1930 when the system was designed and implemented, it is not true today.
Since then the services sector of the Australian economy has grown at a faster rate than the goods sector. Because wholesale sales tax taxes only goods and not services, it has therefore been levied on a smaller and smaller share of the economy with higher and higher rates. Revenues have been maintained by increasing the rates of wholesale sales tax. And the most notorious example was the hike in rates in the Labor 1993 horror Budget.
Wholesale sales tax is incorporated into final retail selling prices of goods and so is "hidden" from the view of consumers. The numerous rates of wholesale sales tax discriminate between similar goods and distort business and consumer choices. And the extent of the exemptions and multiple rates lead to significant administrative and compliance costs.
No other developed country, and only half a dozen in the world still have a wholesale sales tax. They include Botswana, Pakistan, Swaziland and the Solomon Islands. All of these supplement it with a retail service tax and about half are intending to move to a VAT style, broad based tax on goods and services to replace their older models.
The wholesale sales tax is also a cascading tax. While it exempts many goods for use in the manufacture of other goods, it does not contain a general exemption for business inputs. This means something like a 3-5 per cent impost on the cost of exports, even though these are supposedly free of wholesale sales tax.
Very little can be done to improve the cascading problems given the limitations of the wholesale sales tax design. The criteria for exemption - main use - leaves tax where the use in production is less than 50 per cent, but to go further would seriously reduce the revenue collected and over 50 per cent of wholesale sales tax revenue comes from taxing business inputs.
All of this is quite obvious when people think about it. None of it is a secret, which makes it all the more puzzling why we couldnt all agree to change it. We know that the services sector is creating jobs faster than the manufacturing sector. We are told that this is largely to do with changes in technology and increasing total factor productivity. Changes in tastes are also a factor, people are more prepared to spend money on services and hospitality. That is all true. But what is also true is that the manufacturing sector pays most of the indirect tax. If you wanted to design a tax to discriminate against manufacturers it would be hard to conceive of a more discriminatory arrangement than the wholesale sales tax.
The only reason this system exists today is because once in the 1930s it was thought fair. No one, not even the Opposition, would claim it is fair today. But unfortunately not everyone is prepared to fight for the change. Some still argue for the retention of an unfair and discriminatory tax system on the basis that it is hard to change or the interests of manufacturing can be sacrificed.
The Government wants to change the system. The Governments plan is to provide a modern taxation system. A system that not only recognises changes to the structure of the Australian economy over this century, but structural changes that will bear down on us in the next century. We need a tax system for the next century. For manufacturers that means a simpler and fairer indirect tax system. A system which does not rely on multiple rates. A system that does not cascade through the manufacturing process and penalise exports. A system that is fair between the different sectors of the Australian economy.
This is a big change from the past and the Government recognises it will need widespread support to achieve its aims.
Im therefore encouraged by the reports over the weekend which indicate that the Australian business community will put aside sectional interests, with the aim of supporting fundamental reform of Australias tax system. It was tried in the 1970s and failed, it was tried in the 1980s and it failed, it was tried in the 1990s and it failed, and as far as I can tell we are now on our last, best chance.
If we cant do the big issues, it wont be any consolation to do the small ones. Tax reform is this countrys big challenge. Without it we will be shackled by a World War II tax system no longer worth fighting for. A system designed for yesteryear.
I started off by dwelling on the first part of the Make or Break recommendations, number one macro policy, I finish on the second: a new tax system. The whole economy will benefit from tax reform but in particular, manufacturers. Our Government is committed to proceeding with tax reform.
I ask that you join it in working for a better tax system, not a relic of the past but a tax system for the future. A tax system, which if we get it right, can make Australia a tax competitive region, a tax competitive centre in a competitive region; in an economy which will then offer the kind of incentives we know that manufacturers and Australian business need and whats more the kind of tax system that they deserve.
Thanks very much.