1. INTRODUCTION

The overriding purpose of the Liberal/National program of reform is to achieve a generational change in policies and attitudes that will give individual Australians greater control over their own lives. We aim to achieve this goal by creating more incentives and opportunities for all Australians to work harder and be rewarded for it, to save and to invest.

The reform program of the Hewson Government will create nearly two million jobs and halve the unemployment rate by providing a dramatic stimulus to productivity and economic growth.

These objectives can only be achieved if national government sees its proper role as providing a framework of policy and equal laws within which individuals, families and businesses are allowed to fulfil their potential and plan with certainty and confidence.

We believe that policies aimed at building incentives, opportunities and rewards for individuals are the most effective way of overcoming the serious economic and social problems which Australia now faces.

Reform of the taxation system is a fundamentally important focus of our reform program. It is vital to reduce tax and simplify the tax system if the energies, talents and initiative of the Australian people are to be encouraged and fulfilled.

1.1 WHY TAX REFORM IS ESSENTIAL

The current tax system is unfair, complex, kills incentive, reduces our industry's ability to compete and the burden of tax is too high.

It is a fundamental responsibility of government to provide a tax system which rewards those who are prepared to make the extra effort, which allows them to save and profit by their effort, which enhances self-respect through making

personal independence possible, and which provides those in poverty and genuine need with every opportunity to improve their standard of living.

The tax system can have a significant effect on the way in which people invest their money. To the extent that it distorts or biases those decisions it wastes resources and undermines growth. A tax framework which allows people to make sensible investment decisions is crucial to prosperity.

The current tax system fails on every count.

[1]

Labor's tax system undermines the incentive to work harder and save more because of the crippling marginal tax rates imposed on low and average income earners.

It has failed to provide incentives for most Australians to save.

It has worked to the benefit of the rich at the expense of the great majority.

It rewards the tax cheats in the "black economy" and invites avoidance and evasion through various loopholes and administrative complexities, while those who have worked and saved for independence, particularly PAYE taxpayers, have been disadvantaged by inflation and high taxation.

It has created "poverty traps" for many Australians who are denied any real opportunity to work harder and be rewarded for it,

It has imposed major costs on the private business sector, which should be the driving force in job growth, through the ramshackle and costly system of sales tax, payroll taxes, excise taxes, customs duties, compulsory training and superannuation levies, a counter-productive application of the capital gains tax, and through many other cost burdens.

The result is that the rising tax burdens on business have discouraged exports, favoured imports, destroyed jobs and unnecessarily raised costs to consumers.

Under Labor, the burden of taxation has increased, particularly for low to middle income earners because of a failure to contain and reduce waste and duplication in government spending, and because of the encouragement given to dependence on government welfare.

Tax reduction and tax reform are an essential part of what is necessary to rebuild the foundations of Australian prosperity and to provide real opportunities for all Australians.

1.2 WHY EXPENDITURE REFORM IS ESSENTIAL

The size and cost of government in Australia are excessive. Under a Coalition Government both will be reduced. Together with the taxation reforms we will implement, our reductions in wasteful and unnecessary government expenditure will enable people to retain more of what they earn. This will, in turn, improve individual freedom of choice and reduce the unnecessary dependence of people on government.

In reducing the size and cost of government, we have clearly accepted our responsibility to assist those in genuine need. While eliminating abuse of the -velfare system and reducing waste and inefficiency, we will increase assistance those who genuinely need it.

[2]

Over many years, governments have increasingly and inappropriately involved themselves in the provision of goods and services that are more efficiently provided by the private sector. Public sector activities are too often shielded from competition. Individual firms in a competitive, private sector have no option but to minimise costs and maximise efficiency if they are to prosper. This means they must be innovative and responsive to changing demands.

The users of many services supplied by government would benefit considerably if these services were delivered by the private sector, The contracting out of these services will provide a better definition of the service provided and better targeting. It will also indicate the level of, and need for, community service obligations and will be more cost-efficient. Overseas and domestic experience indicates that about 20 per cent can be saved in the costs of delivering a service if it is contracted out to the private sector.

Many of the services currently provided by the public sector can be corporatised, privatised or contracted out with significant cost and efficiency savings to government and thus to the taxpayer.

A Coalition Government will place a high priority in implementing a full program to achieve that outcome.

1.3 OBJECTIVES OF TAX AND EXPENDITURE REFORM

Five guiding principles underlie the tax reform proposals outlined in this document.

First, the aim is to produce lower taxes and a simpler and fairer tax system which will boost the incentives to work, to save and to invest.

This objective requires a reduction in wasteful or unnecessary Federal Government spending. It also requires structural reform of the tax and government welfare systems so that individuals are given a clear choice and positive incentives when making decisions about whether they will work overtime, save another dollar, or invest that money in a business venture for the future.

Second, a tax system is required that will make the Australian economy more internationally competitive and productive. This can be achieved through abolishing inefficient and distorting taxes (such as the wholesale sales tax, payroll taxes and petroleum excise), through changes to the capital gains tax, through removing taxes on business inputs and exports, through encouraging productive investment, and through reducing tax avoidance and evasion.

Third, we aim to make the operation of the taxation system transparent and simple to the taxpayer.

[3]

No longer should the real burden of tax be increased through hidden ad hoc changes to wholesale or payroll tax rates or through automatically indexed increases in excise or in other Federal taxes which are hidden from the view of the taxpayer. No longer should effective marginal tax rates be increased by allowing increased wages to push average taxpayers into even higher tax brackets.

The tax system should be an important part of the accountability of government to those who elect it. It should not make such accountability even more difficult to achieve.

Fourth, we aim to establish a tax system that raises the revenue necessary for government programs in the most efficient and effective way. The current tax system, with its heavy reliance on personal income tax, the distortions it creates through its indirect tax arrangements and its heavy costs on business and exports, is neither efficient nor effective.

And fifth, we are aiming to establish a tax system that builds a stable and reliable base for public expenditure programs in both Commonwealth and State sectors of responsibility. In relation to the State sector, we are working to achieve that objective through moving to a new tax sharing arrangement and through the untied payroll tax abolition grant.

In addition to these objectives of tax reform, there are important objectives underpinning our reform of government expenditure.

In all areas of government, there is a requirement to target programs more effectively, to deliver programs and services more efficiently, and to reduce or abolish programs that are no longer cost-effective or appropriate.

In the circumstances of the worst recession for 60 years, fiscal restraint is essential and every area of government outlays and expenditure priorities needs to be scrutinised.

The next Liberal/National Government will ensure that taxpayers receive value for their tax dollars by:

better targeting government programs and assistance to those who most need them;

achieving greater efficiency in the way programs are managed and in the way services, benefits and assistance are delivered;

reducing or eliminating programs where there is duplication of other services or where provision of benefits or services by government is no longer appropriate; and

achieving greater cost recovery by charging for commercial services and encouraging private sector funding of some programs.

[4]

1.4 CONCLUSION

Australians pay too much tax and get too little value for the tax dollars they pay. A Liberal/National Government will reform the tax system across the board to make it fairer and simpler, thus restoring initiative, opportunities and jobs. We will also ensure that tax revenue is spent in a way that minimises unnecessary and wasteful government expenditure and is targeted to those who genuinely need it.

This document provides the details on how a Liberal/National Government will achieve these goals.

[5]

2. PERSONAL INCOME TAX

2.1 KEY DECISIONS

A Liberal/National Government will:

implement the largest personal tax cuts in Australian history:

- we will slash personal income tax by about 30 per cent - that is, by $13 billion;

- we will raise the tax free threshold from $5,400 to $7,000 with the result that at least another 320,000 low income earners will now pay no tax;

- we will out marginal tax rates across the board, especially targeted at middle income earners;

- 95 per cent of taxpayers will face a marginal rate of 30 cents or less: under Labor, over a half of all taxpayers face a rate of 38 cents or more, up to 47 cents;

- average Australians will be able to double their taxable income and still pay a marginal tax rate of 30 cents;

when our reforms are implemented, taxpayers will be able to earn up to $75,000 and pay a lower rate of marginal tax than they currently pay if they earn more than $20,700;

implement a new tax free savings scheme whereby interest income on new savings up to a limit of $1,000 a year (single) and $2,000 (married) will attract a rebate of 30 cents in the dollar;

increase the corporate tax rate to 42 cents to align it with the significantly reduced top marginal personal income tax rate, and thus eliminate tax avoidance through incorporation;

guarantee the return of revenue from tax bracket creep to taxpayers;

provide tax rebates of up to $100 to $400 for low to middle income earners who take out private health insurance;

provide an additional tax rebate for persons over 65;

Chapter 2 7

encourage higher income earners to take out private health insurance by

adding a surcharge to the Medicare levy for families with incomes above $50,000 and singles above $40,000 who do not have private health insurance;

increase the Dependent Spouse Rebate for eligible families with children to $1,679;

implement a major new initiative to ensure that low income earners are more than compensated for the impact of the Goods and Services Tax through a Goods and Services Tax Credit system;

adjust specific thresholds and allowances under the Income Tax Act for the impact of the Goods and Services Tax;

increase Zone Rebates by at least 25 per cent;

implement a range of other changes affecting personal tax such as a new superannuation tax rebate and the abolition of the lump sum tax (Chapter 7), a new tax free personal savings scheme (Chapter 7), a lower and revised capital gains tax (Chapter 4) and a reduced fringe benefits tax (Chapter 3).

2.2 HOW LABOR'S HIGH TAX POLICY HAS FAILED

There are four major flaws in the personal tax system in Australia.

(i) The overall burden of personal tax is excessive.

Australia has the fourth highest personal tax burden of the 24 OECD countries, and well above the average of the seven major industrial countries, and of course, significantly greater than in the newly industrialised countries of our region.

Moreover, despite three sizeable cuts in personal tax, the Hawke Government has still significantly increased the burden of taxation on household income. In fact, net PAYE tax has increased by nearly 30 per cent, in real terms, under the Hawke Government.

Moreover, average Australian families have been hit hard. For example, the average tax rate of a person on average (male) weekly total earnings with a dependant spouse and two children has increased, while for a family or a single person on three times average earnings, the average tax rate has declined.

8 Chapter 2

(ii) The tax rates significantly reduce the incentives to work.

Workers face high tax rates at low income levels and the situation has worsened dramatically under the Hawke Government. Workers on two thirds of average income face a marginal rate of 38 cents plus a 1.25 per cent Medicare levy.

Yet workers on average income faced a marginal tax rate of only 30 cents when the Hawke Government came to power. It is now 38 per cent, plus the Medicare levy and is fast approaching 46 per cent (plus the Medicare levy).

Indeed, if the Government's Budget forecast for wages growth in 1991/92 is applied to a person earning the equivalent of adult male average (total) earnings, that person would only be $29 per week short of a marginal tax rate of 46 per cent (plus Medicare levy).

Table 2.1 presents estimates of the number and proportion of individual taxpayers in each different tax bracket in 1989/90 together with the appropriate marginal tax rate.

TABLE 2.1

DISTRIBUTION OF TAXPAYERS

Income Tax Bracket Marginal Rate Proportion of Taxpayers in

Each Bracket

Cumulative Proportions

$ 0-$ 5400 0 0.6 0.6

$ 5401-$20700 20 48.5 49.1

$20701-$36000 38 34.3 83.4

$36001-$50000 46 11.6 95.0

$50001+ 47 5.0 100.0

Source: Income Tax Statistics 1989/90 Income Year

Note: The income tax brackets do not correspond exactly with the grades of taxable income provided in the statistics, so the allocation is approximate.

Most disturbingly, over 50 per cent of taxpayers face a marginal rate of 38 cents or more, of which 16 per cent face a marginal rate of 46 cents or more (plus the Medicare levy in both cases).

9

Chapter 2

Clearly, such high marginal rates on low to middle income earners are

unacceptable. There is no doubt they are a serious disincentive to work additional hours, to opt for an additional shift, to move towards (or indeed accept) a promotion, and so on.

The Centre of Policy Studies (1985) has reviewed Australian and US empirical evidence concerning the labour supply response to marginal tax rate reductions. It concluded that there is sufficient Australian evidence to confirm the pattern of US studies of generally low labour supply responses

for prime age males but more substantial responses for females, the young and the elderly. (Centre of Policy Studies in an EPAC Discussion Paper, 1985).

In 1988 EPAC found that:

"High marginal tax rates can have pervasive social and economic ramifications (e.g. for work incentives, wage demands and tax avoidance) which need to be avoided as far as possible."'

More generally, the Centre of Policy Studies stated in a paper prepared for the Business Council of Australia in September 1990 that:

"High marginal rates almost certainly cause significant national income and welfare losses through distortion to work versus leisure decisions and on incentives to evade and to avoid tax." 2

At the very time when the overriding requirement is to work our way out

of our economic difficulties, the personal income tax system is having a disastrous impact on work efforts.

(iii) The Government has increased its revenue by billions of dollars through stealth • by hanging onto revenue generated from bracket creep".

Taxpayers have crept into higher income tax brackets as nominal incomes have increased due to the fact that tax brackets have not been indexed.

10 Chapter 2

TABLE 2.2

THE 1982183 TAX BRACKETS - ACTUAL AND IM)1?XED

Marginal Rate

Schedule For 1982/83 (a)

Average 1982/83 Tax Brackets

1982/83 Tax Brackets Indexed for Inflation to 1991/92 Dollars

not less than

not more than

not less than

not more than

0 1 4462 1 8607

30.67 4462 17894 8607 34517

35.33 17894 19500 34517 37615

46 19500 35788 37615 69035

60 35788 + 69035 +

(a) The marginal rates were changed during 1982/83. This scheme shows the average which applied in 1982/83.

The message from this table is clear. Because of the impact of inflation since 1982/83, tax brackets ought to have been approxinLai,ely doubled to avoid the arbitrary impact of bracket creep. When they were not increased, taxpayers were shunted into higher brackets and therefore into higher marginal rates.

Alternatively, if the tax brackets that had applied in 1982/83 had been indexed, average earners would face lower marginal tax rates than they do at present. Table 2.2 illustrates this effect.

The last two columns of Table 2.2 show the income brackets at which the 1982/83 tax rate schedule would have cut in if the brackets had been indexed for inflation and tax rates had not changed since then.

Quite clearly, a person on average weekly earnings would now face a marginal rate of 30.67 per cent if the brackets had been indexed, instead of 38 per cent, while a person on twice average income would face a marginal rate of tax of 46 per cent. Thus the marginal rate would be considerably

lower for the average income earner, a little lower for someone on twice average earnings, and considerably higher for someone earning three times average weekly earnings.

Chapter 2 11

According to the Business Council of Australia, most individuals on middle

incomes in 1990/91 pay a higher marginal tax rate than on the same real income in 1985/86. (BCA, July 1990)

Indeed, Access Economics (1990) found that:

"... in all years since 1982183 the total personal income tax burden ... has been higher than would have been the case under tax bracket indexation. The additional tax burden, cumulated over the period from 1983/84 to 1990/91 is over $22 billion (measured in 1989190

dollars)." 3

The burden of bracket creep has been borne by lower and middle income earners more than those on high incomes (Lombard 1991).

This result is confirmed in a recent paper by Warren (1991):

"... while the personal income tax became more progressive between 1975/76 and 1984/85, this progressivity has decreased in recent years. This is to be expected because of two factors - fi rs tly a failure to index the personal income tax threshold for the effect of inflation

and lowering of the top marginal tax rate from 60 per cent in 1984/85 to 49 per cent in 1988/89." '

Although the Government has attempted to paint its tax cuts (given to buy wage restraint) as of significant benefit to taxpayers, in reality the tax cuts have done nothing more than repay just some of the proceeds of bracket creep.

"Bracket creep" is yet another example of the Hawke Government's use of "taxation by stealth". It is an invisible taxation method whereby more and more taxpayers end up facing higher and higher marginal rates of tax, with a windfall revenue gain to the Government.

(iv) The present tax system discourages savings.

Not only does the present income tax system discourage additional work, it has a dramatic and equally damaging effect on private savings.

The present income tax system discourages private savings by taxing income earned from savings twice. In the case of a wage and salary earner, income is earned and taxed. If savings are made from after-tax income, the interest income earned will then be taxed. Thus income from savings incurs

double taxation.

The greater the dependence on income taxation, the greater the extent of double taxation and the greater the disincentive to save. This is, therefore, one of the most fundamental arguments for a move away from income to expenditure taxation.

12 Chapter 2

Even more importantly, the interaction of high marginal tax rates and

inflation provides a powerful disincentive to save by creating prohibitively high effective marginal tax rates. In effect, tax is being partly levied on the principal rather than just the income earned.

Based on analysis undertaken by EPAC in 1988, Table 2.3 sets out the effective marginal tax rates on interest income given the current tax schedule and assuming an inflation rate of five per cent and real interest rates of five per cent.

TABLE 2.3

EFFECTIVE MARGINAL RATES OF TAX ON INTEREST INCOME

Income Nominal Tax Rate

(a) (%)

Effective Tax Rate (b) (%)

$ 045400 0 0

$ 5401-$20700 20 39

$20701-$36000 38 74

$36001-$50000 46 90

Over $50000 47 92

(a) Effective from 1 January 1991 (b) Assuming real interest rate five per cent and inflation five per cent

Table 2.3 can be explained as follows: suppose Mr X earns average weekly total male earnings of around $33000. He faces a marginal tax rate of 38 per cent on any additional income. Suppose he puts $1000 in his bank account and, at the end of the year, has earned $102.50 in nominal interest income (assuming a real interest rate of five per cent and an inflation rate of five per cent). The tax paid on his nominal interest income is $38.95. With an inflation rate of five per cent, the purchasing power of Mr X's

original $1000 has fallen by $50. This leaves Mr X with a real interest income of $52.50 ($102.50-$50.00). The effective marginal tax rate is, therefore, 74 per cent ($38.95/52.50).

Similarly, if Ms Y earns $65000 and, under the same scenario of five per cent real interest rates and a five per cent inflation rate, on her $1000 bank balance Ms Y will earn $102.50, paying tax of $48.18 on that interest income. Given that her "real" interest income was only $52.50, her effective

marginal tax rate on interest income is 92 per cent.

Chapter 2 13

Clearly, for many taxpayers the disincentive to save is substantial with

effective marginal tax rates approaching 100 per cent, making saving a very unattractive option.

The interaction of high marginal tax rates and inflation is devastating for our savings effort. It is hardly surprising that our household saving ratio is at its lowest level for over 30 years.

In its 1988 paper referred to above, EPAC concluded that when income tax cuts are financed by spending cuts and the introduction of a broad based consumption tax:

"...to the extent that marginal income tax rates are reduced we would expect unambiguously positive implications for private saving."

It is imperative that private savings are increased if Australia is to invest to rebuild our industry and to stabilise our foreign debt. It is essential, therefore, for the marginal tax rates (especially for those earning lower and middle incomes) to be reduced and for inflation to be cut substantially - not

by recession but through productivity growth.

This tax/expenditure package addresses this issue in three ways - through our commitment to price stability (Chapter 8), through specific tax breaks on interest income (Chapter 7), and through lower marginal tax rates discussed below in this Chapter.

2.3 LOWER INCOME TAX RATES

A Liberal/National Government will implement a reform program that will include the largest personal tax cuts in Australian history. We will reduce net PAYE tax by $13 billion in two phases.

In the first phase from 1 October 1994 tax cuts are concentrated on middle income earners with the result that 95 per cent of taxpayers will face a marginal rate of 30 cents or less. The top personal rate is only reduced from 47 cents to 45 cents in that first phase. This has the effect that with the introduction of the Goods and

Services Tax middle income earners are compensated coincidentally, whereas high income earners will have to wait until the second phase of the tax cuts (from 1 January 1996) to get the full benefit of the tax cuts.

From 1 January 1996, we will introduce a new tax bracket from $50,000 to $75,000 with a marginal rate of 36 cents and we will align the top marginal personal rate with the company tax rate at 42 cents.

Taxpayers at or near average taxable income will be able to double their income without paying a marginal rate higher than 30 cents. (The current marginal rate for average taxpayers is 38 cents and is rapidly approaching 46 cents.)

14 Chapter 2

When our tax cuts are fully implemented, taxpayers will be able to earn $75,000

and still face a lower marginal rate of tax than applies now if they earn above $20,700.

These dramatic reductions in personal tax have three main purposes.

First, they will give added incentives to all taxpayers to work, save and invest.

Second, they are designed to ensure that after-tax income is increased at least by the CPS impact estimated to flow from the introduction of a Goods and Services Tax.

And third, the tax cuts are especially targeted at middle income earners who have been the main victims of Labor's high tax policies. These cuts, linked to our family assistance measures (see Chapter 11), will give these taxpayers the opportunities, incentives and rewards which they deserve but which, under the

Hawke Government, they have been denied.

The two phases for the introduction of the personal tax income tax reductions are shown in Table 2.4.

TABLE 2.4

Present Tax Scales

% Proposed Tax

Scales From. 1 October 1994

% Proposed Tax

Scales From 1 January 1996

$ 0-$ 5400 0 $ 0-$ 7000 0 $ 0-$ 7000 0

$ 5401-$20700 20 $ 7001-$20700 16.2 $ 7001-$20700 16.2

$20701-$36000 38 $20701-$50000 30 $20701-$50000 30

$36001-$50000 46 $50001 and over 45 $50001-$75000 36

$50001 and over 47 $75001 and over 42

The Liberal and National Parties are also committed to aligning the top marginal personal income tax rate, currently set at 47 per cent, with the corporate tax rate, currently set at 39 per cent.

The current top marginal personal tax rate applies to income above $50,000 and, as such, is a disincentive to people who want to work harder and be rewarded for it.

15

Chapter 2

It is also clear that many of the current avoidance and evasion problems (and the

associated legal complexity of the Income Tax Act) are a result of the high marginal personal income tax rates and the gap between it and the company tax rate. This differential discriminates between high income earners who rely primarily on wage and salary earnings (and who pay the top marginal rate) and

those who are able to shield their incomes in private companies (and pay tax at the 39 per cent rate).

In the four years to 1988/89, the number of taxpayers with taxable incomes exceeding $100,000 grew sevenfold (from 7,319 to 58,684), growing by 64.9 per cent in 1985/86, 51.4 per cent in 1986/87, 97.5 per cent in 1987/88, and 62.6 per cent in 1988/89. However, in 1989/90 - the year when the gap was

opened up between the company tax rate and the top personal marginal rate -numbers fell by three per cent. This suggests that tens of thousands of Australians took advantage of this loophole to pay less tax.

A Liberal/National Government will eliminate the current disincentives and anomalies caused by the top current marginal personal income tax rates in two phases.

In July 1993, the company tax rate will be raised to 42 per cent (see Chapter 3).

On 1 October 1994 the top marginal personal tax rate will be reduced from 47 per cent to 45 per cent and on 1 January 1996 will be reduced further to 42 per cent - the same rate applying to company tax (see the above table).

Tables 2.5 and 2.6 below show the proposed reductions in tax across a range of incomes during the two phases of implementation.

16 Chapter 2

TABLE 2.5

PHASE 1: TAX SCALES AS FROM 1 OCTOBER 1994

Income $

Tax Paid

Present Proposed

Scale(a) Scale(a) ColI Col II

$ $

Difference I - II $

Per Cent Reduction In Tax

Per Week Gain (a)

$

Gain In After Tax Income

M

7000 320 0 320 100.00 6.1 4.8

8000 620 162 358 68.9 6.9 4.8

9000 720 324 396 55.0 7.6 4.8

10000 920 486 434 47.2 8.3 4.8

15000 1920 1296 624 32.5 12.0 4.8

20000 2920 2106 814 27.9 15.6 4.8

25000 4694 3509 1185 25.2 22.7 5.8

30000 6594 5009 1585 24.0 30.4 6.8

35000 8494 6509 1985 23.4 38.1 7.5

40000 10714 8009 2704 25.2 51.9 9.2

45000 13014 9509 3504 26.9 67.2 11.0

50000 15314 11009 4304 28.1 82.6 12.4

55000 17664 13259 4405 24.9 84.5 11.8

60000 20014 15509 4505 22.5 86.4 11.3

65000 22364 17759 4605 20.6 88.3 10.8

70000 24714 20009 4705 19.0 90.2 10.4

75000 27064 22259 4805 17.8 92.1 10.0

80000 29414 24509 4905 16.7 94.1 9.7

85000 31764 26759 5005 15.8 96.0 9.4

90000 34114 29009 5105 15.0 97.9 9.1

95000 36464 31259 5205 14.3 99.8 8.9

100000 38814 33509 5305 13.7 101.7 8.7

(a) Annual figures rounded to nearest dollar, Weekly figures rounded to nearest ten cents.

Weekly conversion factor calculated by using the increase of 365 days divided by 7.

Chapter 2

17

TABLE 2.6

PHASE 2: TAX SCALES AS FROM 1 JANUARY 1996

Income $

Tax Paid

Present Proposed Scale(a) Scale(a) Col I Col II

$ $

DifTerence I - II $

Per Cent Reduction In Tax

Per Week Gain (a)

$

Gain In After Tax Income

(%)

7000 320 0 320 100.00 6.1 4.8

8000 520 162 358 68.9 6.9 4.8

9000 720 324 396 55.0 7.6 4.8

10000 920 486 434 47.2 8.3 4.8

15000 1920 1296 624 32.5 12.0 4.8

20000 2920 2106 814 27.9 15.6 4.8

25000 4694 3509 1185 25.2 22.7 5.8

30000 6594 5009 1585 24.0 30.4 6.8

I I 35000 8494 6509 1985 23.4 38.1 7.5

40000 10714 8009 2704 25.2 51.9 9.2

45000 13014 9509 3504 26.9 67.2 11.0

50000 15314 11009 4304 28.1 82.6 12.4

55000 17664 12809 4854 27.5 93.1 13.0

60000 20014 14609 5404 27.0 103.6 13.5

65000 22364 16409 5954 26.6 1.14.2 14.0

70000 24714 18209 6504 26.3 124.7 14,4

75000 27064 20009 7054 26.1 135.3 14.7

80000 29414 22109 7305 24.8 140.1 14.4

ii 85000 31764 24209 7555 23.8 144,9 14.2

90000 34114 26309 7805 22.9 149.7 14.0

95000 36464 28409 8055 22.1 154.5 13.8

100000 38814 30509 8306 21.4 159,3 13.6

(a) Annual figures rounded to nearest dollar. Weekly figures rounded to nearest ten cents. Weekly conversion factor calculated by using the increase of 365 days divided by 7.

These reductions constitute a dramatic change to the current marginal and average tax rates, as Charts 2.7 and 2.8 illustrate. It should also be recognised that the significantly lower marginal tax rates also flow through to the taxation of capital gains, savings and fringe benefits.

18 Chapter 2

AVERAGE TAX RATES

AVERAGE TAX RATE (7..) 0. 5 , -._ --__

0.41-

0.3

0.2

0.1

0 0

0.3

-04

0.3

0.2

0.1

0

120 20 40 60 80 100

INCOME PER YEAR ('000)

- J. ABOR --- LIB/NP 1994 LII3/NP 1996

CHART 2.7

MARGINAL TAX RATES

LABOR, LIB/NP 1994, LIB/NP 1996

MARGINAL TAX RATE

0.2'.i 00

0.1 i 0.1

0 5 10 15 20 25 30 35 40 45 50 55 fi0 65 70 75 80 85 90 95 100 INCOME PER YEAR ('000)

—"' LABOR MARGINAL RATE LiD/NP RATES IA9-a

LIB/VP RATES 1996

CHART 2.8

Chapter 2 19

2.4 PRIVATE HEALTH INSURANCE TAX CREDIT

As explained in the Health Policy in the Supplementary Paper No. 3, the current Medicare surcharge on taxable incomes introduced by the Hawke Government in 1983/84 will remain at its current level of 1.25 per cent.

A Liberal/National Government will provide substantial incentives through the tax system for people to take out private health insurance. In government, we will i mplement what is, in effect, a refundable tax credit system to provide ongoing assistance to income earners below $30,000 who take out private insurance.

The Health Insurance Tax Credit will be available not only to taxpayers but also to those who pay no tax but take out private health insurance.

Details of this Private Health Insurance Tax Credit are as follows:

TABLE 2.9

Income Group Tax Credit

below $12,000 $400 per family

$200 per single

$12,000 - $20,000 $300 per family

$150 per single

$20,000 - $30,000 $200 per family

$100 p er single

An additional tax credit of up to $400 per family and $200 per single will be paid to those persons aged 65 years or more on incomes of less than $30,000. This additional payment will enable those people over 65 with incomes below $12,000 (single) and $14,500 (family) to be effectively provided with the cost of private health cover entitling them, inter alia, to private hospital beds in public and private hospitals and to the doctor of their choice.

2.5 MEDICARE LEVY SURCHARGE FOR HIGH INCOME EARNERS

For the reasons detailed in our Health Policy Paper (see Supplementary Paper No 3), we will encourage higher income earners to take out private health insurance by requiring those with family incomes of greater than $50,000 per annum (singles $40,000 per annum) to either take out private health insurance

or pay a surcharge on the Medicare levy approximately equivalent to the costs of private health insurance.

20 Chapter 2

The amounts payable under this surcharge will be up to $800 per family per full

year and up to $400 per single per full year. These surcharges can be completely avoided by taking out private health insurance.

2.6 SUPERANNUATION TAX REBATE

Under a Liberal/National Government, contributions to a superannuation fund will be taxed at the employee's or selF employed's marginal tax rate but a 25 per cent tax rebate will be granted to all taxpayers on the first $6,000 of superannuation contributions. Lump sum taxes will also be abolished (see Chapter 7).

2.7 RETURNING "BRACKET CREEP" TO TAXPAYERS

A Liberal/National Government will calculate and publish in Budget papers the annual impact of tax bracket creep and commits itself to return that revenue to taxpayers. This commitment has been provided for in our reform package.

2.8 DEPENDENT SPOUSE REBATE

The Dependent Spouse Rebate (DSR) will be increased by $300 for eligible families.

Eligible families with dependent children will receive a DSR tax rebate of $1679 (now $1379).

For families without dependent children the DSR will be increased by six per cent (to compensate for the net impact of the Goods and Services Tax) to $1,204.

To better target it to those in need, the Dependent Spouse Rebate will be phased out from $75,000 for families with dependent children and from $50,000 for those without dependent children at the rate of one dollar for every four dollars of additional income.

2.9 GOODS AND SERVICES TAX CREDIT

To assist persons whose incomes are too low to be adequately compensated for the introduction of a Goods and Services Tax through reforms in the tax system and who are also outside the existing income support systems, we will introduce a Goods and Services Tax Credit system (refundable). Full details of the system are

provided in Chapters 10 and 12.

21

Chapter 2

2.10 THRESHOLDS AND ALLOWANCES

Specific thresholds and allowances applying under the Income Tax Act will be adjusted for the impact of the Goods and Services Tax including those applying to the Medicare levy, the Zone Rebate, the Sole Parent Rebate and various claims for dependants. The adjustments to be made to specific allowances are addressed

separately in Chapter 11.

2.11 ZONE REBATES

In addition to the change in the Zone Rebate Threshold, we will also make .changes to the Zone Allowance rebate. An additional sum of $34 million, or around 25 per cent, has been allocated to increase Zone Rebates.

On a pro rata basis, a 25 per cent increase in the basic Zone A Rebate would increase the existing flat $270 rebate by $67.50. Also on a pro rata basis, a 25 per cent increase in the Special Zone A Rebate would increase the existing flat

$938 rebate by $234.50. Zone B Rebates would increase in the same relative terms.

In Government we will also review the definition of the Zones.

2.12 TAX FREE SAVINGS SCHEME

The Tax Free Savings (TFS) scheme will have important personal tax implications. Under the scheme families with taxable incomes below $50,000 will be able to earn up to $2,000 in interest income from new savings tax free. Single people with taxable incomes below $50,000 will be able to earn up to $1,000 from new savings tax free. (For further details see Chapter 7).

2.13 PRESCRIBED PAYMENTS SYSTEM

A LiberaVNational Government will review the Prescribed Payments System to determine whether the present withholding rate is appropriate in the context of the new income tax rate scales.

22 Chapter 2

References

1. Office of the Economic Planning Advisory Council (1988) "Trends in Private Saving", Council Paper No. 36.

2. Centre of Policy Studies, Monash University, "Some Issues in the Consumption Tax Debate", Paper prepared for the Business Council of Australia, September 1990.

3. Access Economics, "Budget Monitor", April 1990.

4. Neil Warren, "Recent Trends in Australian Taxation and Their Impact on Tax Incidence", Paper No. 1991 /3, Centre for Applied Economic Research, University of NSW, 1991.

Chapter 2 23

3. TAXES ON BUSINESS

3.1 KEY DECISIONS

The business sector will benefit directly from the tax measures in the Liberal/National reform package. Taxes on business will be cut by at least $20 billion. Most importantly, we will:

• abolish the $9.4 billion wholesale sales tax;

• abolish the $5.8 billion payroll tax;

abolish the $6.6 billion excise on petroleum products (about 55 per cent of which falls on business);

• abolish effectively all $3.3 billion of customs duties;

• rebate Goods and Services Tax paid on most business inputs, including businesses competing with imports;

• reduce the tax on exports by $1.7 billion.

In addition, the Liberal and National Parties propose to implement a range of other measures to reduce cost disadvantages to the business sector:

our overall reform package dramatically lowers many business costs by 20 to 50 per cent;

the revised and lower capital gains tax system will permit greater access to rollover relief and make additional allowance for goodwill;

• the coal export duty will be abolished;

• the training guarantee levy, which is in effect an extra tax on employers, will be abolished;

the level of compulsory employer contributions to employee superannuation, in place at the time of the next election, will be retained but there will be no further compulsory increases. Further increases will be on the basis of

choice and incentive, rather than Labor's compulsion;

we will review the present depreciation arrangements to help Australian business to be able to match best international practice;

Chapter 3 25

company tax deductions for research and development costs will continue

from July 1993 at 125 per cent, but we will ensure strict measures to guard against abuse and we will promote new R&D links between industry and universities;

the fringe benefits tax will be reduced significantly and loop holes eliminated through the alignment of the corporate and top personal tax rate.

These tax changes are also to be seen against the background of the other elements of our reform agenda designed to reduce or eliminate major cost disadvantages to business (e.g. on the waterfront, in utilities, telecommunications, aviation, shipping, land transport, development approval processes, training and

others).

As with other sectors, the business sector will be expected to contribute to, as well as benefit from, the reform process under a Liberal/National Government. We are also committed to bringing the corporate tax rate into alignment with the top personal marginal tax rate.

3.2 LABOR'S HIGH TAX POLICY ON BUSINESS

Wholesale sales taxes, payroll taxes, petroleum excise, customs duties and other taxes shown in Table 3.1 add around $15 billion to business costs directly, and perhaps an additional 20 to 30 per cent indirectly through the cascading effect of some of these taxes.

There are additional problems, however, with the current system of business taxation.

It encourages debt over equity finance and discourages large investments with long lead times (such as the Very Fast Train project and the Alice Springs to Darwin rail link).

The capital gains tax discourages investment in new businesses and the expansion of existing ones.

• The rate of company tax is set considerably lower than the top marginal personal tax rate, thus encouraging incorporation to limit tax liability.

• The compulsory training and superannuation levies are counter-productive to lowering inflation and creating jobs.

2 6 Chapter 3

TABLE 3.1

INDIRECT TAX INCIDENCE ON INTERMEDIATE AND FINAL DEMAND

1990/91 15% Package

Total Domestic Total Domestic

$m $m $m $m

GST 1 0 0 50788 4837

0 0 20110 20110

WST I 3465 3099 0 0

F 5900' 5682 0 0

Petrol I 3208 2644 0 0

F 2602 2564 0 0

Tobacco I 29 20 36 25

F 1341 1344 1676 1667

Beer 1 1 1 1 1

F 878 878 878 878

Other excise I 31 27 31 27

F 474 474 474 474

Franchise 1 858 707 618 506

Petrol F 668 658 431 422

Tobacco 1 26 18 29 20

F 1166 1159 1322 1315

Beer I 0 0 0 0

F 480 480 473 472

Other I 8 7 8 7

Alcohol 117 117 115 115

Payroll Tax 1 5832 5114 0 0

Customs I 0 0 0 0

Duty I 1286 1119 1241 1080

F 1589 1479 1533 1427

TOTAL 29959 27581 34054 33383

INTERMEDIATE 14744 12756 7042 6503

FINAL DEMAND 15215 14825 27012 26880

Reduction in Tax on: Inputs $7702 million

Exports $1707 million

(a) Includes $1398 million collected from GST levied on residential construction materials. (b) Of which $1214 million is on investment final demand expenditure.

Chapter 3 27

3.3 THE LIBERAIJNATIONAL COMMITMENT TO REDUCE

BUSINESS COSTS

The private business sector, the main generator of sustainable job growth, will receive a significant boost from the wide-ranging program of structural economic change to be implemented by a Liberal/National Government.

Business currently labours under massive cost disadvantages relative to best international practice, paying 20 to 50 per cent too much for electricity, transport, waterfront clearance and other services. The central thrust of many of our reforms is to reduce and eliminate these cost disadvantages.

Business will also benefit directly from the abolition of, or reforms to, taxes which impose a significant relative cost disadvantage on Australian business generally, but most significantly on exporters and on those businesses whose products compete with imports.

Business costs will be reduced significantly by our proposed abolition, of the wholesale sales tax, payroll taxes, refined petroleum excises and customs duties (see Chapter 5). The Goods and Services Tax. will be fully rebatable for most business inputs including fuel. It is a tax on consumption; it is NOT a tax on

business.

Businesses will also receive greater incentives for investment through our proposed changes to the capital gains tax (see Chapter 4).

These reforms will dramatically reduce the costs imposed by government on private sector businesses, give Australian exporters and firms competing against imports a much sharper competitive edge, and work to the advantage of Australian consumers.

Business will also benefit from our commitment to price stability and from the increased economic activity generated by our reform program.

Our tighter fiscal policy and National Savings Strategy will mean significantly lower interest rates in nominal real terms and lower our exchange rate towards its long run competitive level.

It will benefit from the contracting out to the private sector of many government services, the reduced cost of government, the better opportunities for productive investment, and the encouragement we will give to workplace agreements.

In this economic climate, the private business sector's capacity for growth and for providing long-term jobs will increase significantly.

In addition to these reforms, a Liberal/National Government will introduce a range of other measures to reduce costs to business and thus to boost competitiveness, productivity and jobs.

28 Chapter 3

3.4 THE TRAINING GUARANTEE LEVY

The Liberal and National Parties are committed to upgrading vocational training and making it more responsive to the requirements of industry and the workforce.

Achieving that objective will require closer co-operation between the traditional sources of vocational training, the TAFE colleges and industry.

It also will require that the TAFE colleges be more closely integrated with secondary schools and universities within their own State as well as in other States.

These processes have already begun, but they need to be accelerated. Our industrial relations reform will assist through the impetus it gives to practical and relevant workplace training.

We will also take some specific funding decisions to further accelerate the program. We will, for example, provide an additional $75 million for TAFE in our first term (see "World Class Education and Training" in Supplementary Paper No 4).

The Federal Government's increasing resort to compulsion in the training area is counter-productive. It is discouraging the links that are developing at the initiative of the parties themselves.

The aim of the program has been to increase the overall level of training.

But legislation that compels employers with a payroll above a particular level to spend a progressively larger proportion of that payroll on training is inefficient and inequitable in the same way as payroll taxes and compulsory occupational superannuation.

The operation of the levy must be seen in the context of actual business reactions.

Large employers with training programs already in place are relatively unaffected. But other, smaller employers have been forced to divert funds from priorities which they had determined would best develop their firms. And some employers have simply avoided expanding their operations so that they will not incur the

direct and indirect costs imposed by the Government's training levy.

As the Business Council of Australia concluded:

"Skills formation should be market driven. Australia needs a more flexible labour market and the last thing we need is a costly bureaucratic apparatus which will create new kinds of inefficiencies for firms."1

Consistent with our commitment to reduce and eliminate unnecessary taxes which inhibit employment, a Liberal/National Government will abolish the training guarantee levy.

Chapter 3 29

Since the money currently raised by the levy (around $5-10 million) is dedicated

to training programs of questionable value, those payments will be discontinued with the result that the abolition of the levy will be budget neutral.

The above initiatives should be seen in context with our $3 billion Education and Training Program. .

3.5 THE SUPERANNUATION GUARANTEE LEVY

The superannuation guarantee levy is a significant additional on-cost to business.

It will add to inflation and unemployment.

The Liberal/National Party will oppose legislation for the introduction of this levy when it comes before the Parliament in 1992.

The level of compulsory employer contribution in place at the time of the next election will be retained, but we will also encourage voluntary, enterprise-level employment agreements which will seek to achieve a co-operative approach to retirement saving by employers and their employees tailored to the competitiveness of the enterprise and, hence, the long-term job security of the employees. Our superannuation tax rebate is designed to encourage further voluntary increases in superannuation contributions. For a full discussion of our superannuation arrangements see Chapter 7.

3.6 COMPANY TAX

It is expected that companies will utilise most of the gains provided by reform of taxation and other reductions in costs under a Liberal/National Government to make their own operations more efficient and more internationally competitive. Some of the gains will flow initially into restoring corporate profitability which will provide both the incentive and capacity for new investment and jobs.

Our reform package will cut taxes on business by at least $20 billion.

In view of these very substantial and wide-ranging benefits which our reform program will provide to private businesses, the Liberal and National Parties have reviewed the current rate of company tax.

In doing so, we have also taken into account the need to align the rate of corporate tax with the top rate of personal income tax in order to eliminate tax avoidance by means of incorporation.

30 Chapter 3

Accordingly, the company tax rate will be increased to 42 per cent from

1 July 1993. The revenue impact of this change will not occur until the 1994/95 year by which time most of our taxation, expenditure and microeconomic reforms will have been put in place. Taken together with the change in the personal tax rate outlined earlier, the new company tax rate will enable the company and top

marginal personal tax rates to be aligned by January 1996. In the longer term we are committed to reductions in the corporate tax rate in tandem with the top personal rate.

3.7 DEPRECIATION ALLOWANCES

Total investment in Australia is at the lowest level in over 30 years.

The current poor investment outlook is not simply a cyclical phenomenon. It is the result of deep seated problems in the Australian economy which have discouraged business from making major capital investment in Australia. These problems include an industrial relations system which fails to maximise productivity, a taxation system which discourages incentive, high real interest

rates (leading to an uncompetitive exchange rate), bureaucratic and special interest group obstacles to project development, and structural inefficiencies, particularly in shipping and on the waterfront, which impose significant cost disadvantages on Australian exporters.

The combined result of these impediments is that companies are investing less in Australia and some are making decisions to locate operations offshore which they would otherwise conduct in Australia.

Improving the investment climate lies at the heart of our reform agenda to rebuild Australia.

The business sector will have to finance the move out of areas in which it is not competitive with the rest of the world. It will have to boost efficiency in areas where it does, or could, have comparative advantage. And it will need to invest in the new activities which will advantage Australia in world markets over the

rest of the decade.

If these goals are to be achieved, Australia's tax system must give adequate incentive to business investment. If it fails to do so, Australia's prospective growth potential will be stifled.

The present business tax system results in relatively high net rates of tax on investment in new plant and equipment, thus reducing incentives and limiting the capacity of businesses to invest.

In this year's March Industry Statement, the Hawke Government announced its intention to introduce a depreciation system based on the effective life of assets. The administrative problems inherent in this approach have delayed its implementation.

Chapter 3 31

It is now apparent that the Government's specific proposals to adopt an

appropriate "effective life" basis for assessing depreciation have done little to boost investment incentives for Australian businesses.

The reality is that uncertainty and unpredictability about depreciation arrangements for business continue. Further changes to the Government's proposed system are therefore likely.

Against this background of uncertainty, the Liberal and National Parties will review whatever depreciation arrangements may exist at the time we come to government. The intention of this policy review will be to enable businesses to claim investments in plant and equipment as write-offs against their tax liabilities at

a rate that gives them greater incentive to invest in the latest technology and that enables them to match best international practice. Our purpose will be to enable businesses to make these investment decisions within practical and predictable administrative arrangements.

This review will include an examination of the need for a faster write off of certain types of assets.

3.8 THE RESEARCH AND DEVELOPMENT TAX DEDUCTION

If the private business sector is to compete effectively with the world, it is important that the tax system provides adequate incentive to undertake greater efforts in research and development (R & D).

While the rate of growth in R & D by the public and private sectors in Australia over the past decade has been ahead of the OECD average, this growth of spending has been off a substantially lower base. Australia still has a long way to go to match the pace on research and development set by our competitors.

Chart 3.2 shows that of nineteen OECD countries, only New Zealand, Ireland and Spain spend a smaller proportion of GDP on R & D than Australia does. On average, the commitment of Australian companies is only half the level of their OECD competitors and only about a quarter that of strongly performing economies like Switzerland, Japan and Germany.

32 Chapter 3

CHART 3.2

OECD FUNDING LEVELS FOR R & D AS A PERCENTAGE OF GDP

Switzerland Japan Germany

United States Sweden France Netherlands

United ICingdom Norway Finland Belgium Denmark

Austria Canada Italy

AUSTRALIA New Zealand Ireland Spain

2.5 2 1.5 1 0,5 • 0 0.5 1 1.5 2 2.5

-L%"

DIRECT GOVT ^3 OTHER FUNDS BUSINESS FUNDS

Source: Budget Statement L99L-9E

If Australia is to realise the objective of increasing our competitive capability and

matching best international practice, the emphasis given, in financial and structural terms, to R & D needs to increase markedly.

Australians are a talented and innovative people. The growth in the number of international patents applied for by Australians is the highest among OECD countries. This natural aptitude needs to be encouraged by committing greater resources to R & D.

The Liberal and National Parties' program of economic reform will remove many of the impediments which have hindered research an d development in Australia.

At present, a deduction of up to 150 per cent is available for R & D spending which will be reduced, according to the March 1991 Industry Statement, to 125 per cent from 1 July 1993.

A Liberal/National Government will follow this timetable and maintain the maximum deduction at 125 per cent for research and development expenditure.

We are determined, however, to see that these provisions are not abused by contrived arrangements. Accordingly, tough anti-avoidance provisions relating specifically to the R & D deductions will be included in the amending legislation.

Chapter 3 33

We are committed to providing an additional $228 million over a six year period

for research to train outstanding young graduates and to encourage clearer research links with industry. Five hundred new post-graduate research awards will be made available and $25 million per year will be allocated to a program to reward institutions which are successful in obtaining research contracts for

industry. (For further details see "World Class Education and Training" in Supplementary Paper No 4).

3.9 COAL EXPORT DUTY

The coal export duty was imposed in the mid- 1970s to siphon off high profits earned by coal exporters in the wake of the 1973 world oil price shock, This justification is no longer tenable, if it ever was, as coal prices have dropped significantly.

Following changes over the past 15 years, the coal export duty now applies only to high quality coking coal produced mainly for the steel industry by six Queensland mines all owned by BHP-Utah Coal Limited, an Australian-owned enterprise.

The coal export duty is inequitable in that it discriminates against some coal mines and not others. It is also a tax on exports and distorts investment decisions in the coal industry.

A Liberal/National government will abolish the coal export duty.

In 1990/91 the coal export duty raised $49 million.

3.10 FRINGE BENEFITS TAX

We will reduce the rate of the existing fringe benefits tax from 48.25 per cent to 46.25 per cent and later to 43.25 per cent in order to align it with the top marginal rate plus the medicare levy. We will review anomalies arising from the application of the fringe benefits tax, especially in the mining, pastoral and tourist

industries and in isolated areas.

3.11 TAX REVIEWS

Two major tax reviews will be undertaken by the Coalition in government.

A review of the tax treatment of large projects (e.g. the Very Fast Train and the Alice Springs to Darwin rail link).

A review of the taxation of certain financial transactions, most notably swaps options and other financial instruments and derivatives.

34 Chapter 3

3.11.1

Large Projects

The recent abandonment of the Very Fast Train project has been attributed in part to the view that current taxation concessions are inimical to investments in large scale projects of this kind.

In recent years investment in public infrastructure has fallen dramatically. It is the view of the Liberal and National Parties that current tax impediments to major private sector investment projects should, wherever appropriate, be removed.

A general feature of large scale infrastructure projects is that, in the initial years of construction when large tax losses are accrued, no income is earned. Consequently the sponsor company is forced to carry forward unutilised tax losses. If the investor is able to immediately offset these losses against other income the

overall economies of the project may be altered.

Irrespective of the merit of the Very Fast Train project and other factors which may have affected its economic viability, the Liberal and National Parties believe a mechanism needs to be put in place to review the tax position of such large scale

infrastructure projects.

This is particularly important if Australia wishes to encourage increasing private sector participation in these projects.

In government, we will call for submissions relating to delayed income projects and the capacity to distribute accruing tax losses to shareholders. As soon as practical thereafter we will make a policy statement.

3.11.2 Financial Transactions

The Coalition proposes to act decisively to clear up existing uncertainties concerning the tax treatment of various financial instruments such as swaps, options and other financial derivatives by legislating, inter alia, to introduce tax timing rules whihc better align with accepted accounting principles.

We will also monitor the relative tax position of Australian financial institutions in the context of the proposed further development of the financial sector in Australia.

3.12 TAX ADMINISTRATION

As announced in Chapter 9, an internal Australian Taxation Office Ombudsman will be appointed and the new Australian Taxation Office Board of Directors will be charged with the responsibility of advising the Government on simplification of business taxation and the reduction of compliance costs.

Chapter 3 36

References

I. Business Council of Australia, Press Release 'The Business Council Re-affirms Strong Opposition to Training Levy", 25 June 1989.

36 Chapter 3

4. CAPITAL GAINS TAX

4.1 KEY DECISIONS

The Liberal/National reform package will make major changes to the capital gains tax system to provide significant tax relief, incentive, and retirement benefits for small business people, farmers and small investors. We will do so in the following ways.

Capital gains tax will continue to apply, but at the significantly lower marginal income tax rates, to real capital gains on assets bought after 19 September 1985.

To reduce paperwork and simplify the system, there will be an option to pay capital gains tax at a flat rate of 30 per cent on nominal gains on assets held for five years or longer.

Capital gains of less than $3,000 made by an adult individual in each year are to be exempt from tax.

Relief from capital gains tax on the sale of goodwill will be provided at the following rates: 50 per cent relief up to $500,000; 30 per cent between $500,000 and $1,500,000; 10 per cent between $1,500,000 and $2,000,000; and no additional relief above that figure.

Abolish capital gains tax on the sale of a business by retirees aged 60 or more on gains up to the value of ten times average annual earnings (currently around $300,000).

Abolish capital gains tax on the sale of a business, up to the value of ten times average annual earnings, provided the funds are placed in an Approved Deposit Fund until retirement.

Full relief from capital gains tax will be provided on the rollover of a business into a like business where the disposal price does not exceed $5 million. This benefit will be available once every five years.

The income tax free discount on shares issued to or bought by employees through an employees' share ownership scheme will be increased to $500.

Chapter 4 37

4.2 PROBLEMS WITH LABOR'S CAPITAL GAINS TAX

The taxation of capital gains is an essential element of any taxation system which continues to rely on income as a taxation base. Without it, there would be an incentive for some people to take their remuneration in the form of capital gain rather than income and escape their tax obligations. Without it, there would be

a strong incentive to speculative property and share transactions.

However, Labor's application of the capital gains tax since 1985 has been far too sweeping and administratively difficult, particularly for small investors. It has been fixed at too high a rate and it has penalised many thousands of Australians who have put their efforts into building up a business or farm to support their

families and provide for their retirement.

The small business sector is a large employer of Australians. About 800,000 small businesses provide jobs for more than two million Australians, comprising about half of private sector employment.

Australia desperately needs people prepared to put their capital at risk to rebuild the private business sector, create jobs and foster self-reliance.

Yet the capital gains tax introduced by Labor is a serious impediment to investment and growth. Combined with high real interest rates and declining activity caused by the recession, the capital gains tax is sapping the vitality of Australia's business sector.

It has proved to be a bigger burden on business than anticipated. When the capital gains tax was introduced in 1985, the then Treasurer estimated that after five years it would yield only $25 million in revenue. But in 1990-91, some $631 million was extracted by the capital gains tax.

The most counter-productive aspects of Labor's capital gains tax are:

80 per cent of the goodwill value of a business (up to a ceiling of $1 million) is liable to capital gains tax - a significant deterrent to working hard to build up a business;

the application of capital gains tax to the "nest egg" assets of Australians who sell their business on retirement;

the application of capital gains tax to assets sold in the process of expanding a business - a major disincentive to growth and employment;

the application of the capital gains tax and its administrative burden especially to very small investors;

very small investors and many individuals are quite innocently caught up in the capital gains tax net.

38 Chapter 4

The Liberal and National Parties recognise that there is a legitimate place in the

income taxation system for a tax on capital gains derived as income. In government, however, we will remove the worst aspects of Labor's capital gains tax which is penalising Australians prepared to work hard on their own account.

Accordingly, we will amend the Capital Gains Tax to take account of the legitimate needs and concerns of small businesses and farmers and introduce changes which significantly reduce the compliance problems faced by taxpayers, particularly average Australians who, knowingly or unknowingly, make small

capital gains in the course of their normal activities.

The Liberal and National Parties have decided to adopt the following changes to Labor's capital gains tax arrangements.

4.3 THE RATE OF TAX

The tax payable on capital gains will continue to be calculated according to the existing formula using the marginal rates of tax applying under our taxation policy. These marginal rates will be significantly lower than under Labor's tax regime. As at present, the tax will apply to net real capital gains on assets acquired and disposed of after 19 September 1985 and calculated according to the cost base and indexing provisions of the present legislation.

However, the Liberal and National Parties recognise that some taxpayers have difficulty in complying with the present inflation adjustment provisions because they are incredibly complex and because of lack of records. Accordingly, the Coalition Parties will offer individuals the option of paying tax on capital gains at

a flat rate of 30 per cent on nominal gains on assets which have been held for five years or longer.

To prevent possible abuse, this option will not be available for gains resulting from restrictive covenants (except where the covenant is given by the vendor of a business held for five years or more), premiums on leases and other similar deemed disposals.

4.4 EXEMPTION FOR SMALL CAPITAL GAINS

The present capital gains tax is very complex and can impose heavy compliance costs on ordinary taxpayers and owners of small businesses who are unsure as to both their liability for tax and the method of calculating their liability. As a result, compliance by individuals on small capital gains is low and many may

unwittingly be breaching the taxation law and be liable to penalty. 0 The Liberal and National Parties find this existing situation to be both inequitable

and contrary to the principles of self-assessment which are now followed in taxation collection.

Chapter 4 39

Accordingly, an exemption will be introduced on small net capital gains made by

individuals. The exemption will operate as follows.

When individuals complete their annual income tax return, they will continue to state on the tax form whether they have sold or disposed of any assets or received any other capital amounts during that financial year.

Adult individual taxpayers who have made net gains in any year which they assess to be under $3,000 may simply specify the year of acquisition of the assets concerned, the nominal purchase price and the nominal sale price of the assets concerned. Subject to normal audit provisions, these taxpayers will then pay no tax on relevant capital gains.

The small net capital gains exemption will be introduced in the first Budget after the next election and will apply to all capital gains on assets acquired after 19 September 1985.

Consideration will be given in that Budget to providing a tapering arrangement to reduce the severity of the tax penalty faced by taxpayers who may exceed the threshold by a small margin.

To prevent abuse, the exemption for small gains will not be available for gains resulting from restrictive covenants, premiums on leases and other similar deemed disposals.

4.5 THE GOODWILL EXEMPTION

The present capital gains tax can fall harshly on the most innovative and hardworking individuals in our society who build up a business from nothing by their own personal efforts, often receiving little income in the process, but who then must normally pay capital gains tax on disposal of their business. That tax is calculated on the plant, equipment, buildings and related assets of the business,

as well as the goodwill component of the sale price. The goodwill component is a reasonable measure of the personal exertion, risk and financial sacrifice which the individual has put into the business.

In partial recognition of this, the present capital gains tax system includes a small one-fifth reduction in the goodwill component of the capital gain up to a maximum net value of $1 million.

The Liberal and National Parties have decided that the goodwill relief arrangements should be amended to encourage the innovative and entrepreneurial members of our society to enter and build up businesses for the good of themselves, their families, local employment prospects and the Australian

economy.

40 Chapter 4

Under our revised arrangements, there will be 50 per cent relief on that part of

the capital gain attributable to the sale of goodwill where the sale price for the goodwill is $500,000 or less.

To the extent that the goodwill gain lies between $500,000 and $1,500,000, the additional capital gains tax relief will be set at 30 per cent.

To the extent that the goodwill gain lies between $1,500,000 and $2,000,000, additional capital gains tax relief will be set at 10 per cent.

To the extent that goodwill is above $2,000,000, there will be no additional capital gains tax relief.

For example:

A couple sell a business which they founded after 1985 and jointly own. The sale price comprises:

Trading stock $1,000,000

Depreciated plant $ 300,000

Goodwill $1,600,000

$2,900,000

Because the couple started the business, and paid nothing to acquire goodwill, their goodwill has no cost base, which can be indexed for inflation. Each therefore has a gain of $800,000 on the goodwill (half of $1,600,000).

Each of the partners will be entitled to the following relief:

First $500,000 x 50% = $250,000

Next $300,000 x 30% _ $ 90,000

$340,000

Each will therefore pay tax at their marginal rate on a gain of $460,000 ($800,000 minus $340,000) in relation to their goodwill.

If they have owned the business for more than 5 years they may elect to pay tax on this gain at 30%. They may also have to pay tax on the sale of their trading stock and their equipment, if its value exceeds its depreciation value.

Chapter 4 41

In addition, the Liberal and National Parties have decided to abolish the

"associated business" provisions of the present tax legislation. Specific anti-avoidance provisions will be introduced to guard against the sale of businesses in tranches and other potential avoidance techniques.

The partial goodwill exemption will only be available once every five years.

The new rules will apply from the date of the next election.

At the time of the first Budget after the next election, consideration will also be given to extending the goodwill exemption outlined above to sales of goodwill by family or closely-held companies or trusts, or where shares are sold in such companies to the extent that the sale price reflects goodwill. Anti-avoidance provisions will ensure that these exemptions interface with the goodwill exemption

for individuals and that individuals do not get the benefit of "double-dipping". These additional goodwill exemptions will operate from the date that legislation is introduced.

4.6 RETIREMENT RELIEF

Self-employed people often are required to put all their resources into their businesses and farms and, as a result, are unable to contribute to a superannuation fund in the same way as many other workers are able to do.

Their business or farm is their sole asset and "nest egg" for retirement.

The Liberal and National Parties have decided that this group of people should receive relief on the capital gains tax payable on the net proceeds from the sale of their businesses within the broad guidelines applying to the Coalition's superannuation arrangements (see Supplementary Paper No 2).

Under these arrangements, a person aged 60 or more who sells a business, or an interest in a business, and then retires, or who is forced to retire earlier through ill-health or disability, will be able to receive 100 per cent relief on the net capital gain assessed on the assets disposed of up to a value equal to ten times average

annual earnings - an amount currently equal to about $300,000.

Additionally, if a person voluntarily sells a business, or an interest in a business, at any age prior to age 65, he or she will be eligible for 100 per cent retirement relief up to a maximum limit of ten times average annual earnings provided the funds are then placed in an Approved Deposit Fund and not utilised until

retirement.

The partial goodwill exemption will only be available once every five years.

The new rules will apply from the date of the next election.

42 Chapter 4

4.7 ROLLOVER RELIEF

The existing rollover provisions of the Capital Gains Tax do not cater adequately for businesses wishing to expand by way of realising an asset and utilising the proceeds of the asset to acquire a "like" asset. For example, a manufacturer who wishes to sell one factory and acquire a larger factory and, in doing so, employ

more staff and generate more economic activity, is currently penalised under Labor's Capital Gains Tax.

The Liberal and National Parties have decided, therefore, to extend the existing rollover relief provisions applying for destruction or involuntary disposal of assets to "like kind" asset exchanges. (For definitional information see Appendix I attached to this chapter.)

This will enable business people to expand their enterprises without being penalised by capital gams tax in the process.

It will be available where a business proprietor, including a company, sells an asset then buys another similar asset within twelve months for the purpose of continuing in the same or similar business.

For example:

A couple owns and actively operates a farm which they sell for $1 million. They reinvest the proceeds in a larger farm which they buy for $1.5 million and which they lease to a partnership in which the partners are themselves and their two sons. The partnership actively operates the farm. The couple are entitled to a deferral of capital gains tax on the sale of the first farm

under the Coalition's extended rollover relief provisions because they actively operated the first farm and their family controls the partnership which actively operates the new farm.

Investments such as shares in companies will be excluded.

The relief will be limited to cases where the disposal price does not exceed $5 million. Appropriate phasing arrangements will apply on implementation of the measure.

Moreover, the relief will only be available for taxpayers once every five years, and anti-avoidance provisions will be inserted to prevent taxpayers "double dipping" through interposed entities.

The new rule will apply from the date of the next election.

Chapter 4 43

4.8

EMPLOYEE SHARE PARTICIPATION

The present employee share provisions of the capital gains tax provide a disincentive to equity participation by employees of businesses wishing to issue shares as part of a remuneration package.

Employees can presently participate in share purchase schemes and obtain shares to the value of $2,000 at a discount of $200 each year without paying income tax on the discount, provided those shares are held for not less than three years.

We wish to encourage greater employee participation in companies, particularly in the context of the large privatisation program we plan to undertake.

Accordingly, we will extend the value of shares which may be issued under employee participation schemes to $5,000 with the tax free discount being $500.

The present holding requirements will also be removed as they place the employee at risk since the shares which are received as part of a person's remuneration are exposed to market fluctuations.

However, to prevent abuse, if employee shares issued under these concessional arrangements are sold by the employee within three years of the date of issue, any gain will not be subject to the exemption for small capital gains.

The new rules will apply from the date of the next election.

Employees will be encouraged to join share equity schemes offered by their employers by removing the existing restrictive rules on holding periods of shares issued in such schemes.

4.9 BUDGET IMPACT

The estimated cost to revenue of these improvements to the Capital Gains Tax system under a Liberal/National Government is $200 million.

44 Chapter 4

ATTACHMENT 1

DEFINITION OF 'LIKE KIND ASSET EXCHANGE"

The definition of "like kind assets" will be along the following lines. To qualify, both assets must be used in an active business of the trader. Use for rental, hiring and licensing will not qualify as an active business. Where a trader disposes of a qualifying asset (the "old asset") and within 12 months of that

disposal enters into a contract to acquire another qualifying asset (the "new asset"), the trader may elect to defer payment of capital gains tax on the gain if the new asset belongs to the same category as the old asset. When the new asset is disposed of, capital gains tax will be payable on the gain in respect of the old

asset which had accrued at the time of its disposal. There may or may not be capital gains tax payable for any gain on the disposal of the new asset which will be calculated separately and under the normal rules. To the extent that proceeds on the disposal of an old asset are not reinvested in any new like asset, partial relief only will be available.

The categories of qualifying assets are:

(1) Land and buildings occupied and used for the purpose of the taxpayer's business or trade. Land held as trading stock by a builder or dealer in land will not be eligible for relief;

(2) Fixed plant or fixed machinery which is not part of a building;

(3) Boats, ships and other craft used for commercial purposes;

(4) Aircraft;

(5) All other moveable plant or machinery, for example motor vehicles, mobile cranes;

(6) Goodwill;

(7) Mining and quarrying rights;

(8) Other government licences.

Provided the old asset and the new asset fall within the same category deferral will be available, although the assets may have dissimilarities. For example, if the goodwill of a bakery is sold and the goodwill of a bookshop is acquired, this will be the acquisition of an asset of a like kind. Another example is where a truck is disposed of and a mobile crane is acquired. These will also be assets of a "like kind". But if the proceeds of mining rights are reinvested in the goodwill of a business, deferral will not be available. In the case of category 1, where farming Iand is

Chapter 4 45

owned by a person and leased or licensed by that person to a business entity

controlled by that person's family, rollover will be allowable under the conditions outlined here. A partial rollover will be allowable where an asset is used only partly for business purposes.

46 Chapter 4

5. INDIRECT TAXATION

5.1 KEY DECISIONS

A Liberal National Government will:

abolish the wholesale sales tax, Labor's hidden consumption tax;

fund the abolition of State payroll taxes;

abolish petroleum product excise;

phase out customs duty;

introduce a broad-based 15 per cent Goods and Services Tax;

increase excise on tobacco by 25 per cent;

abolish the automatic indexation of excise.

5.2 PROBLEMS WITH INDIRECT TAXATION UNDER LABOR

Australia's indirect tax base is narrow, arbitrarily defined and grossly inefficient.

At the Commonwealth level, Australia currently relies on three types of indirect, or consumption, taxes: the wholesale sales tax which raised $9.4 billion in revenue in 1990/91, excise duties of which the petroleum products excise ($6.6 billion) is the most significant, and customs duty

($3.3 billion).

At the State level, payroll tax is the single largest revenue raiser yielding $5.8 billion in 1990/91.

Each of these types of indirect tax is inefficient and counter-productive. They are significant imposts on business and, therefore, re3ult in lower investment, lower exports and fewer jobs.

5.2.1 The Wholesale Sales Tax

The wholesale sales tax actively penalises manufacturing production and all exports, is an administrative nightmare and falls most heavily on the poorer sections of the community.

Chapter 5 47

In its Draft White Paper on Taxation Reform in 1985, the Government

acknowledged the defects of the wholesale sales tax:

"The existing WST is a narrowly-based tax which applies only to selected consumption goods and some intermediate goods. It does not cover any services, and it has many anomalies and inconsistencies... Its lack of comprehensiveness in coverage, and its multiple tax rate structure, lead to a number of problems:

- the narrow tax base means that higher tax rates are required to generate a given level of revenue;

• the tax impacts differentially on various commodities and so interferes with consumption and production decisions;

individuals with the same income bear different tax burdens merely because they have different consumption patterns; and

the extent of commodity exemptions and the multiple tax rates lead to greatly increased administrative costs.

The six major flaws of the wholesale sales tax are examined in more detail below.

(i) Narrow Base

In 1989/90 the total wholesale sales tax base represented less than 40 per cent of the value of private final consumption expenditure. Anomalies and inconsistencies abound making the administration of the tax very unwieldy.

The main distortion is that services are not directly taxed. Their omission is clearly regressive because services (such as restaurant meals, taxi fares and hair styling) are consumed disproportionately by the well-off. Regressivity is discussed further below.

The wholesale sales tax is an administrative nightmare.

The Centre of Policy Studies (1990) stated that:

"The somewhat arbitrary pattern of exemptions, and ambiguity in definition of the point of and value of sale in assessing the tax liability, mean that the wholesale sales tax is complex, often uncertain and poorly defined. "

Over half of total wholesale sales tax collections are from taxes on transport equipment, household and office equipment and furniture. Other major items taxed are a narrow range of beverages and confectionery and a broad range of paper and printing products.

48 Chapter 5

The wholesale sales tax falls, therefore, mainly on manufacturing industries -

industries which must become internationally competitive if we are to begin to trade our way out of our huge foreign debt and create sustainable jobs.

Under the wholesale sales tax, these industries are saddled with a tax system which actively disadvantages them on world markets by taxing inputs which, under most other indirect tax regimes, are tax free.

(ii) Multiple Rates

The wholesale sales tax applies multiple rates (0, 10, 20 and 30 per cent) to a range of goods, resulting in significant classification problems and costly administration and compliance.

There is no rhyme or reason why wholesale sales tax is levied at different rates. For example, wholesale sales tax is levied at 10 per cent on dishwashers, 20 per cent on school exercise books and 30 per cent on wrist watches. Cotton buds are taxed but cotton balls are not taxed. Toothpaste is

taxed but toothbrushes are not taxed. Above-ground pools are taxed but inground pools are not taxed. Free-standing wardrobes are taxed but built-in wardrobes are not taxed.

The reasons for introducing different classifications within the wholesale sales tax may have been clear when the wholesale sales tax was introduced in 1930 but the structure of the economy has changed fundamentally since then and the relatively simple patterns of production and distribution which

characterised our economy sixty years ago no longer apply.

Under the wholesale sales tax, taxes "cascade" through various stages of the production process (as taxes are levied on taxes) leading to even greater divergence between the effective rates applied to different goods.

As Warren (1990) explains:

"Currently many taxes are levied on outlays by firms for inputs into the production of goods and services. The taxes on these inputs have a cascading or pyramiding effect because of the mark-up by sellers of the tax implicit in the price of inputs. This means that the cumulative effect

of the taxes levied on goods and services is greater than the tax revenue raised. By replacing these taxes with an identifia ble tax such as VAT, tax pyramiding can be eliminated".

The combination of the "cascading" of the wholesale sales tax, its taxation of inputs and its four different rates means that different effective rates apply on different goods and services as shown in Table 5.1. The table demonstrates that all categories of goods and services bear some wholesale sales tax either

directly or indirectly. The wholesale sales tax is equivalent to a hidden consumption tax of 5.4 per cent on final consumption.

Chapter 5 49

TABLE 5.1

FINAL INCIDENCE OF THE WST ON FINAL CONSUMPTION (1990-91)

Expenditure Cate gory Effective tax rate (%)

housing 7.4

fuel 4.0

food (incl. beverages) 3.3

clothing & footwear 1.8

furnishings and appliances 8.5

household services 4.4

medical services 1.3

transport 8.1

recreation 3.5

personal care 5.9

miscellaneous 4.7

TO TAL 1 5.4

(Source: Centre of Policy Studies, 1990)

Table 5.2 shows the amount of wholesale sales tax paid by 14 community groups by level of income.

Estimates of the amount of wholesale sales tax paid by major types of business are shown in Table 5.3.

50 Chapter 5

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Chapter 5

51

TABLE 5.3

ESTIMATES OF THE STATUTORY INCIDENCE OF WHOLESALE SALES TAX PAID BY DIFFERENT BUSINESS TYPES, 1990/91

Goods comprising main taxable sales in each business type

Wholesale Sales Tax Paid

($m) % of total

WST Paid

Motor cars, commercial vehicles, including motor bodies, semi trailers, etc 1927.3 18.1

Tyres, tubes, retread and recap rubber, wet cell batteries oils and greases 356.3 3.3

Boat, parts and accessories, including sails and boat trailers 49.9 0.5

Household appliances, parts and accessories 756.3 7.1

Household hardware, crockery, glassware, cutlery, brooms and mops 130.3 1,2

Domestic and office furniture, equipment and machines 721.3 6.8

Household drapery, soft furnishings and manchester 75.1 0.7

Blinds, curtain tracks and fittings 36.7 0.3

Floor coverings 83.9 0.8

Motor cycles, bicycles, parts and accessories 89.7 0.8

Motor vehicle parts and accessories nei 780.0 7.3

Caravans, trailers nei parts and accessories 34.6 0.3

Confectionery 98.3 0.9

Building materials and hand tools 233.5 2.2

Insecticides, herbicides, etc. 5,1 0.0

Spirits, beer and wines 786.3 7.4

( Soaps, detergents, disinfectants, toilet and beauty 360.5 3.4

I E preparations 505.1 4.7

Printing, printed stationery, bookbinding and signwriting 181.8 1.7

j4 Paper, stationery, paper products nei cardboard containers

k 4 Toys, games, novelties, fireworks, pens, pencils, drawing 213.3 2.0

material 136.8 1.3

Sporting equipment, arms and ammunition 194.6 1,8

Jewellery, fancy goods, watches, clocks 0.7 0.0

Furs 46.8 0.4

Suitcases, handbags, purses, wallets, baskets 142.2 1.3

Photographs, motion picture films 54.0 0.5

Cameras, photographic equipment and accessories 22.0 0.2

Musical instruments 903.7 8.5

Machines and machinery nei including earthmoving 11.4 0.1

equipment 324.9 3.0

Canvas goods, nei, rope and cordage 219.7 2.1

All other taxable articles 80.5 0.8

Composite businesses - not including motor vehicles or parts 60.2 0.6

Composite businesses - including motor vehicles or parts 0.0 0.0

Manufactured pet foods 794.2 7.4

Gliders and aircraft Returns for which at present, no code has been allocated 10668.0 100.0

TOTAL

52 Chapter 5

Wholesale sales Tax base estimates

by industries in 1989-90 for different rates of the wholesale

sales tax (reported in Table 6.5, p.284-5, Taxation Statistics 1988/89) were used to calculate the tax paid by each industry in 1980/90. Then using the Budget forecasts for the revenue collected in aggregate from each of the rate categories (reported in Budget Paper No. 1, Table 6, p.425), estimates of the tax paid in 1990/91 by each industry were made assuming no change in

distribution of the tax in each rate category across industries.

(iii) Inputs are taxed

A tax like the wholesale sales tax which is imposed on business inputs - and, in particular, one which involves different rates on different inputs - distorts the choice of production processes and the choice of products produced.

As the Centre of Policy Studies (1990) found:

"These distortions mean that the allocation of scarce labour, capital and other resources is changed so that the value of national production is less than it would be under a tax system which either exempted all inputs or placed identical effective tax burdens on all business inputs".

In its 1985 Draft White Paper on taxation reform, the Government recommended that intermediate goods should not be subject to a consumption tax - except in the last resort case where it is impracticable to tax final consumption of a good directly.

The estimates shown in Table 3.1 indicate that the burden of the wholesale sales tax as a tax on business inputs and business investment is over $7 biliiorl. It found that 37 per cent of the initial incidence of the wholesale sales tax is on goods used as inputs into other businesses and a further 13 per cent is paid by businesses on investment goods.

The major items taxed as business inputs are transport equipment, furniture and furnishings and paper and printing products.

The wholesale sales tax adds heavily to transportation costs.

Most motor cars, commercial vehicles parts and accessories are taxed at rates of 20 to 30 per cent. Indeed, the impost of the wholesale sales tax on the road transport industry has been estimated as in the order of $1 billion a year. For a large country like Australia, dependent on an efficient transportation system, this discrimination is costly and illogical.

(iv) Taxes exports and favours imports

The wholesale sales tax taxes exports and favours imports. It saddles Australian manufacturers with a tax system which actively disadvantages them on world markets by taxing inputs which, under most other indirect tax systems, are tax free.

Chapter 5 53

Exports are not part of the consumption of Australians - they generate part of

our income. Exports should, therefore, be excluded from the consumption tax base.

As shown in Table 3.1 over six per cent of the final incidence of the wholesale sales tax (about $600 million) is on exports. According to the Centre of Policy Studies, the effective rates on exports range from 0.5 per cent on community services to 2.6 per cent on mining, 4.6 per cent on forestry, fishing and hunting

and 6.8 per cent on transport equipment.

In general, our exporters compete on world markets in which they are "price takers", making it difficult for them to pass on the impact of the wholesale sales tax in the prices they charge their foreign customers without losing their market share.

Our exporters are competing with many other countries which have the advantage of value added taxes. As the Hughes Report stated in 1989:

"In most value added systems (and all European ones) each firm claims a refund or credit for the value added tax paid on its inputs and pays value added tax on its sales. The exemption on exports means that value added tax paid on purchased inputs are rebated to the exporter, who does not

have to pay tax on export sales. This is the source of disadvantage for Australian exporters, particularly of manufactures".

Most countries exempt their business inputs and exports from their indirect tax base giving their imports to Australia an added advantage viz a viz domestically produced goods which are subject to the wholesale sales tax.

Ironically, the situation is made worse by the fact that imports are more favourably treated under the wholesale sales tax system than domestically produced goods. This is principally because imports do not suffer the cascading

effect of the wholesale sales tax system.

Clearly, given Australia's fundamental trade imbalance, the wholesale sales tax is working against Australia, reducing exports, investment and jobs.

(v) Regressivity

The burden of the wholesale sales tax falls most heavily on low income earners. For example, the wholesale sales tax paid by families with children on the lowest 10 per cent of incomes is 4.2 per cent of their income compared with 2.9 per cent for families in the highest 10 per cent of incomes.

Adjusted for inflation, the wholesale sales tax burden falling on every Australian adult has risen from about $480 a year to about $760 a year - or by nearly 60 per cent and none of this has been compensated.

54 Chapter 5

Since 1985, an increasing proportion of indirect tax is now collected from the

wholesale sales tax.

In isolation this would have tended to increase the regressivity of the Commonwealth's indirect tax system but effective reductions in tobacco and alocohol excises have offset such increases.

In other words, the Hawke/Keating Government's concept of "equity" has been to effectively cut taxes on beer and cigarettes while surreptitiously pushing up the tax on a widening range of other more essential commodities via the wholesale sales tax.

In an EPAC Background Paper (1991), Warren concludes that:

"The changes to the WS?' [since 1984/85] appear to have increased the regressivity of this tax..."

"the distributional impact of the tax has only marginally changed for most income deciles (groups) with the exception of the lowest decile where the tax burden has increased noticeably."

Warren also found that the tax burden has increased particularly noticeably for the bottom 10 per cent of incomes, in other words, the poorest in our community.

Under the Hawke Government, massive increases in the wholesale sales tax have contributed significantly to the widening of the gap between the richest and the poorest.

Of the total income redistributive impact of Federal indirect taxes, the wholesale sales tax's contribution to the change in income inequality has increased from 27 per cent in 1984/85 to 36 per cent in 1988/89.

Table 5.4 below shows the incidence of the wholesale sales tax on different types of taxpayers.

Chapter 5 55

TABLE 5.4

INCIDENCE OF WST FOR AVERAGE PERSONS BY COMMUNITY GROUP

% of income

single earner family, no children 3.6

two earner family, no children 3.1

single earner family, children 3.6

two earner family, children 3.4

self-employed 4.1

farmer 6,8

single, Government benefit 3.4

married couple, Government benefit 3.9

income from interest, dividends, rent and superannuation

5.4

unemployment/sickness benefit 4.1

Regressivity is clearly indicated by the fact that single earner families pay a higher incidence of wholesale sales tax than do two income families (who generally earn more) and those on government benefits face a similar incidence to those who are earning incomes despite the fact that their income is considerably lower.

Low income earners have borne a disproportionate share of this increase in "taxation by stealth". Despite these insidious increases over the last eight years, explicit compensation has never been offered to the low income earners who have clearly suffered a disproportionate share of the impact of increases in

the wholesale sales tax,

(vi) Lack of Transparency

The wholesale sales tax is a hidden tax.

The Government has systematically and deliberately increased the wholesale sales tax by nearly 60 per cent in real terms since it came to power.

Most Australians are unaware of these increases and many are not even aware that the wholesale sales tax exists. Goods on which the wholesale sales tax is paid do not bear any sign in supermarkets so consumers are often not aware of which goods are taxed directly, let alone indirectly.

56 Chapter 5

5.2.2 Petroleum Excise

Petroleum excise is a heavy consumption tax levied on a particularly narrow base. Although excise on petroleum products is often considered a crude method of financing road construction, it has never been formally hypothecated and over the years has developed more and more as simply another milch cow

for government revenue. Table 5.5 shows how petroleum excise revenue has assumed an increasing importance in the total taxation of petroleum.

TABLE 5.5

PETROLEUM PRODUCTS EXCISE (MOTOR SPIRIT AND DIESEL FUEL)

EXCISE TAX CENTS PER LITRE (as at August in each year)

1982/83 6.155

1983/84 9.027

1984/85 9.327

1985/86 10.007

1986/87 23.884

1987/88 20,097

1988/89 21.530

1989/90 23.152

1990/91 24.920

1991192 25.767

Note: Automatic indexation commenced in August 1983 and, in most years, took place in February and August.

Charts 5.6 and 5.7 show the consequential effects of the dramatic increase in the ad valorem equivalent excise rates which result from the increasing proportion of excises as an element of total petroleum taxation.

Chapter 5 57

(10

10

20

11)7_2 1977

,r) U1( iAC Roporl \o. 3`17

1082 1087 1992

it0

CHART 5.6

AD VALOREM EQUIVALENT RATE OF TAX

PETROL - 1 JANUARY TO 13 SEPTEMBER 1936 f

EQUIVALENT RATE OF TAX (%) 120 __ -- — W _.__

100

60

10

-

0 50 100 130 200

DAYS

ourrv: IAC Rrpurl No. .J7

CHART 5.7

AD VALOREM EQUIVALENT RATE OF TAX

PETROL -- 1972 TO 1991

EQUIVALENT RATE OF TAX (%)

58 Chapter 5

The petroleum products excise currently collects about 25 cents a litre in

revenue of which only the equivalent of roughly six cents is currently spent on road construction and maintenance. Chart 5.8 shows the phenomenal increases in this excise tax over the life of the Hawke Government.

CHART 5.8

CRUDE OIL AND PETROLEUM PRODUCTS

COMMONWEALTH EXCISE COLLECTIONS

9 BILLIONS 8 r ---

7^

i 1

l f

5 ^^ I

4r

83/84 84/85 83/86 86/87 87/88 88/89 80/90

CRUDE OIL & LPC> PETROLEUM PRODUCTS

Source: Budget Papers No. I

Petroleum product excise has increased from $1.3 billion in 1982/83 to

$6.6 billion in 1990/91 - a real increase of over 300 per cent. To add to that it is automatically indexed to six monthly movements in the Consumer Price Index.

Abolishing petroleum excise will result in a significantly lower petrol price and will have a widespread impact throughout the economy as the cost of petrol is an important (and often large) component of the cost structure faced by most industries and individuals.

In particular about 55 per cent of the incidence of petroleum products excise falls on business ($3.6 billion) while about 16 per cent of petrol excise revenue is levied on exports ($1.1 billion) and 15 per cent of the excise on intermediate goods falls directly on investment ($990 million).

Chapter 5 59

As the then Industries Assistance Commission (IAC) put it in 1986:

"... Taxation of a widely used intermediate, such as petroleum or steel has a complex incidence. The implicit tax rate on industries using the taxed intermediate rises, resulting in the "taxes on taxes" problem where industries with the same nominal treatment of final output have different effective tax

rates depending on their use of the taxed intermediate".

It is sometimes argued that high taxes on petroleum products are appropriate for conservation reasons (ie, discouraging the use of a depletable resource). But the scarcity of petroleum will be reflected in the world market price and Australian consumers of petroleum products will respond accordingly.

It is also argued that high taxes on petroleum products are necessary to protect the environment (ie, to discourage the use of fuels which contaminate the air). But, in fact, about 85 per cent of automotive fume emissions are from motor vehicles which are 10 years old or more. The average age of a family car in Australia is now 14 years.

Given the considerable costs of petrol excises on businesses, exporters and consumers in its 1986 report on petroleum taxation, the Industries Assistance Commission concluded that:

rates of petroleum product excise were too high;

a strong case could be made for exempting the intermediate use of petroleum products from excise; and

a broadening of the commodity tax base by introducing a value added tax would have a number of benefits;

• would increase GDP (in the short term) by a minimum of one per cent - that is around $4 billion per year.

There is no doubt that there is considerable scope for the petroleum excise to be reduced to the benefit of road users, businesses and, ultimately, all consumers without undermining the establishment of a more broadly based, user pays method of cost recovery for road use.

The abolition of petrol product excise will boost the competitiveness of our traded goods sector substantially, leading to larger exports, greater investment and more jobs.

As our car fleet gets younger, therefore, the cost of pollution imposed on the rest of the economy by petrol fumes becomes smaller. And as the tariffs on motor vehicles are reduced, the price of cars falls, making new cars more affordable. Thus it can be expected that the rate at which Australia's car fleet is renewed will accelerate as Australian tariffs are reduced.

60 Chapter 5

A more appropriate means of addressing the pollution issue is to regulate

exhaust emissions directly rather than using the environment issue to disguise the milking of fuel excise for general revenue.

5.2.3 Customs Duty

In 1990/91 customs duty raised $3.3 billion of Commonwealth revenue (3.6 per cent of total tax revenue) from the imposition of tariff protection.

An integral part of the Coalition's reform package is the reduction in tariffs to at most "negligible" levels by the year 2000. The implementation of this policy will see revenue from customs duty virtually disappear by the end of the current decade.

The Coalition's decision to reduce tariff protection is based on evidence of the costs imposed on the entire community by tariffs on particular industries.

The Industry Commission (IC) estimates that the removal of all assistance to the rural and manufacturing sectors will increase real GDP by 1.1 per cent (or over $4 billion per year) in the long-term. Investment and aggregate employment would also increase and inflation would be significantly reduced.

The reasons for the significant benefits of reducing protection are clear. Protection actively encourages manufacturers to lock in bad work practices, become inward looking, generally inefficient and fragmented.

It imposes substantial costs on all domestic purchasers of the protected good (businesses and consumers) and causes resources to be directed to activities in which they otherwise would not be allocated.

In 1985, it was estimated that manufacturing protection cost each Australian farmer about $9000 a year - the national total was $1.5 billion each year. A similar cost applied to miners.

Moreover, each year, industry protection costs Australians the equivalent of a $10 billion tax, with exporters bearing between $7 billion and $8 billion of this amount.

In the IC's 1989/90 Annual Report, protection of manufacturers' inputs was estimated to amount to $4.6 billion in 1989/90. However, this figure includes some "cascading" or double counting of tariffs. Nonetheless, it would be safe to assume that at least $3.5 billion would be a direct impost on manufacturers.

Protection does not even necessarily strengthen the industry it is supposed to be helping. It is no coincidence that the manufacturing industries which have fared worse than others during the current recession are clothing and footwear - two of the most highly assisted industries.

Chapter 5 61

For example, the textiles, clothing and footwear industries shed about 17,000

jobs in the 12 months to August 1990 when their protection was at a peak. For some clothing and footwear items, effective protection was higher than 250 per cent. This translates into consumer prices for these goods being dramatically higher than would otherwise be the case. The Industry Commission has found

that assistance to the clothing and footwear industries is equivalent to an average increase of 35 per cent in their consumer prices (IC, 1990).

Abolition of customs duties over the decade will therefore more than offset the net price impact of the Goods and Services Tax on clothing and footwear.

Overall, according to the IC, all assistance increased consumer prices by 5.6 per cent on average in 1988/89:

"The price increase amounts to a consumer tax equivalent to over $10.8 billion (1988/89 values) or some $650 per Australian. The consumer tax equivalent of assistance amounts to some 5 pr cent of recorded household income less income taxation and some 3.8 per cent of household expenditure."

The IC also concluded that the taxing effect of assistance on households is regressive, increasing from four per cent of income for the highest income group to 12 per cent for the lowest.

The phasing out of customs duty through the 1990s will remove a source of significant distortions and higher costs for all consumers.

5.2.4 Payroll Tax

Payroll taxes discourage employment and raise consumer prices. Over 60 per cent of jobs in the private sector are subject to payroll tax - over 3.5 million jobs.

Australia currently has the second heaviest dependence on payroll tax in the OECD. Indeed, hardly any of the major successful OECD countries levy payroll taxes at all.

The payroll tax base is extremely narrow and the tax burden has been heavily concentrated on the largest firms.

In 1988, the NSW Tax Task Force stated its concern:

"In this regard, an important statistic is that in 1986/87, 753,000 out of a total [NSW] labour force of around 1.4 million (or about 54 per cent) were employed in the larger firms subject to the [payroll tax] surcharge."

62 Chapter 5

Thus payroll taxes discriminate against large firms because of the threshold

which exempts smaller businesses. Moreover, the payroll tax has a differential impact on industries according to their labour intensity. Service industries and labour intensive manufacturing industries bear a larger burden of payroll tax than other industries on average.

The payroll tax clearly discourages employment to the extent that firms are unable to pass on the costs of the payroll tax on to consumers.

In a paper on the incidence of payroll tax, Chapman and Vincent (1985) concluded that:

"The reduction in industry wage costs associated with the removal of [payroll tax] levied at a standard rate of 5 per cent with exemptions results in a substantial boost to real output and employment demand." (p. 34)

On the basis of such evidence, the removal of payroll tax would make a substantial contribution to creating jobs.

As Tables 5.9 and 5.10 show, payroll tax rates and thresholds vary both across and within States arbitrarily imposing different costs on similar firms in different States. The decisions of firms on location and hiring are therefore often distorted.

TABLE 5.9

LEVEL OF PAYROLL AT WHICH PAYROLL TAX IS PAYABLE ('000 p. a) (AS AT I/1/90)

New South Wales 500

Victoria 410

Queensland 500

Western Australia 320

South Australia 414

Tasmania 500

Australian Capital Territory 500

Northern Territory 400

Chapter 5 63

TABLE 5.10

AVERAGE RATES OF PAYROLL TAX (%) (AS AT 1 JANUARY 1991)

On $1 Million Payroll

On $10 Million Payroll

New South Wales 3.5 6.7

Victoria 4.1 7.0

Queensland 3.3 5.0

Western Australia 3.6 6.0

South Australia 3.7 6.0

Tasmania 5.8 TO

Source: NSW Treasury.

Table 5.11 shows the percentage of State revenue constituted by payroll tax.

TABLE 5.1I

% OF PAYROLL TAX AS STATE REVENUE

State % of State Tax

Revenue 1989/90 (a)

NSW 25.4

VIC 28.6

QLD 22.4

WA 26.3

SA 24.4

TAS 27.4

ACT 21.1

NT 31.5

(a) Source: ABS Australian Taxation Statistics 1989/90 Cat. No. 5506

64 Chapter 5

5.3 THE GOODS AND SERVICES TAX

It is proposed to introduce a single rate, 15 per cent, Goods and Services Tax on 1 October 1994.

The academic literature, good tax design and international experience strongly suggest that the base for the Goods and Services Tax should be as comprehensive as possible and that there should be a uniform ad valorem rate applied to that base. This:

minimises distortions that otherwise would arise between goods and services that are taxed and those that are outside the tax net;

minimises opportunities for avoidance and evasion and greatly simplifies the administration of the Goods and Services Tax;

• ensures that the introduction of the Goods and Services Tax represents an improvement over the indirect taxes that it replaces.

Ideally, it would be desirable to include all of what is known to economists as private final consumption expenditure" in the Goods and Services Tax base. However, some exceptions are required on practical grounds and the base has been calculated with this in mind.

Goods and services which are "zero-rated" will not carry any tax burden. In such cases there will not be a Goods and Services Tax on the goods and services being sold, and any Goods and Services Tax paid on their business inputs will be fully rebateable.

Goods and services which are "exempt" also will not have a Goods and Services Tax applied to the final goods and services being sold. However, any Goods and Services Tax on their business inputs will not be refundable. In other words, there will be a Goods and Services Tax on their inputs only. These

"exempt" goods are exempted because of the administrative difficulties of imposing the tax at the point of final consumption.

Items that are to be zero rated are:

health and education services;

government provision of non commercial activities (including local government rates);

sale of a business as a "going concern";

welfare, religious and charitable institutions;

exports.

Chapter 5 65

Items that will be exempt from the Goods and Services Tax but input taxed

are:

residential rents and construction;

other building construction;

financial services;

gambling and lotteries.

The Goods and Services Tax Technical Manual (see Supplementary Paper No. 6) gives more details on the scope and applications of the exemptions and zero ratings indicated above.

Table 5.12 gives a summarised run-down of how the calculations are made, using the National Accounts data supplied by the Bureau of Statistics, to get from private final consumption expenditure to the Goods and Services Tax base after exempting rents, building construction and other items such as financial services.

TABLE 5.12 GOODS AND SERVICES TAX REVENUE

1990/91 Full Year Effect ($m)

Private final consumption expenditure (PFCE) 229,738

PFCE adjusted for indirect tax reform, zero 181,013

rating, input taxing, black economy and foreign tourist expenditure

GST revenue 27,152

As the above table shows, after adjusting for various decisions on the exemptions and exclusions from the total private final consumption expenditure, the tax base for the Goods and Services Tax is $181,013 million.

A 15 per cent Goods and Services Tax yields revenue from this tax base of $27,152 million of which around $1,200 million is identified as being derived from the black economy and spending by foreign tourists in Australia.

It should be noted that although the Government has never come clean, we believe that the estimated collections from the black economy are based on a similar methodology to that used in the Hawke Government's 1985 Draft White Paper on Tax Reform in Australia.

66 Chapter 5

Although there is strong evidence that suggests that the size of the black

economy in Australia is around 10 per cent, we have chosen a conservative black economy figure of around five per cent and assume a degree of income tax revenue clawback that would result from the need for Goods and Services Tax registration pushing tax cheats into the income tax net.

5.3.1 Why a Goods and Services Tax?

The decision to adopt a 15 per cent Goods and Services Tax reflects the necessity to change Australia's grossly unfair and inefficient taxation system and is an essential part of a package to boost our national productivity and savings.

The objectives of indirect tax reform are:

• to sweep away Australia's main inefficient consumption taxes such as sales taxes, fuel excises and payroll taxes (see section 5.2);

to achieve greater international competitiveness by greatly reducing taxes on business inputs and exports;

• to boost our national savings;

• to make the consumption tax regime more neutral and efficient in its effect on production and spending decisions;

• to simplify the tax system;

to assist in reducing high marginal income tax rates in order to increase incentives to work, save and invest;

to making the tax system fairer by reducing avoidance and evasion.

The Coalition's Goods and Services Tax is a version of value added tax - the most preferred indirect tax system used by member countries of the Organisation for Economic Cooperation and Development (OECD).

There are two principal types of broadly based goods and services tax - a value added tax and a retail sales tax.

A retail sales tax is a single stage levy on consumer goods and services applied to the retail value of the product at the point of sale to the final customer. That is to say the tax is only levied when customers walk into stores and make their purchases.

Chapter 5 67

The problems with this approach to taxation are that retail sales do not

necessarily correspond to final consumption. There are two major problems with a retail sales tax. A single stage tax is easier to avoid than a multi-stage tax. In addition, sales by wholesalers, manufacturers and others also go into final consumption. Furthermore, small businesses, farmers and others

frequently purchase inputs at the retail level.

By comparison, a value added tax is a multi-stage tax, levied at all stages of production or sales, with rebates for tax paid on inputs. And it is much more difficult to avoid.

Registered business enterprises are allowed a tax credit for tax previously paid on their input purchases. In effect, they remit a tax to the government only on value added by the enterprise. Since the sum of all values added equal the retail price, the burden on the final domestic consumption sales is the same as the retail sales tax burden. Therefore, both the retail sales tax and the value

added tax place the same burden on final consumption purchases. However, in practice the distinction between retail and wholesale gets blurred. Only a value added tax guarantees that business inputs for further processing and

distribution are free of the sales tax.

Whereas the Hawke Labor Government's 1985 Draft White Paper favoured a retail sales tax (largely on the basis of the then perceived higher compliance and administrative costs of a value added tax), the Asprey Committee (1975) argued in favour of a value added tax system and it has gained increasing favour internationally in recent years, 21 out of the 24 OECD countries have a value added tax system, with Canada recently introducing one.

Some main advantages of the value added tax are:

it more effectively sorts out sales for final consumption expenditure from sales for business inputs;

it more efficiently sorts out sales for exports from sales for domestic consumption;

there is less scope for avoidance and evasion as the tax is collected at each step of the production/distribution chain.

For these and other reasons, the Coalition has decided on a value added tax rather than a retail sales tax.

A Goods and Services Tax, with a comprehensive base and single rate, is regarded as the best form of value added tax. It is a tax which is charged on the supply of goods and services in Australia and on the importation of goods into Australia.

68 Chapter 5

The Goods and Services Tax is levied at all stages of production and

distribution, with credits available for the Goods and Services Tax paid on business inputs so as to avoid double taxation.

The Goods and Services Tax is charged, except in the case of exempt supplies, every time a business supplies goods or services in the course of its business activity. Goods and Services Tax paid in this way is collected by the business which supplies the goods or services on behalf of the Taxation Office and is

remitted to the Taxation Office at the end of fixed periods by means of lodgement of regular returns.

The Goods and Services Tax is not a tax on business or its profits. It is a tax on consumption of goods and services in Australia. It is the final consumer who uses the finished goods or services who ultimately pays the full Goods and Services Tax liability. However, the impact of the Goods and Services Tax on

consumers must be considered in the context of the abolition of the existing wholesale sales tax, payroll tax, petrol excise, the training guarantee levy, reduction in customs duties and substantial income tax cuts, together with various social security measures.

Table 5.13 provides a practical example of how a goods and services tax works.

Chapter 5 69

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70 Chapter 5

The Goods and Services Tax will be collected by businesses and organisations

that are registered with the Taxation Office.

As a general proposition, any person who is conducting a defined taxable activity may register. However, persons conducting a taxable activity in excess of a determined turnover level (which is proposed to be $30,000) will be required to register. Below that level of sales, registration will be optional.

Registered persons will lodge Goods and Services Tax returns with the Taxation Office at the end of fixed periods of time. For large businesses this will probably be monthly and for most other businesses it is more likely to be bi-monthly. In some special cases, the period could be up to six months.

In these returns, the person will show total sales and purchases made during the period. The Goods and Services Tax paid by the business on its purchases of goods and services is called "input tax" and the tax charged on its sales is "output tax". The input tax is subtracted from the output tax for the period to

give the amount of Goods and Services Tax payable to the Taxation Office for that period.

If, in any period, the input tax exceeds the output tax, the Taxation Office will refund the excess. In many cases it will be possible to get back the rebate on inputs before the goods are sold. The Tax Office will be required to pay

interest on late payments.

Through this regular return system, although businesses who are registered for Goods and Services Tax will pay Goods and Services Tax on purchases of goods and services, a credit (or a refund) may be claimed for this input tax in the Goods and Services Tax return. Therefore, as a general rule, no Goods and

Services Tax is borne by the business.

Excepting cases of exemption, Goods and Services Tax is therefore borne only by the final consumer. It is not a cost to business! All up, there can be considerable cash flow advantages to small and medium size business from the move to a Goods and Services Tax when compared to the current wholesale

sales tax system.

5.3.2 Defining The Taxation Base

On the issue of what to include in the Goods and Services Tax base, the overriding concern has been to make the tax apply to as broad a base as is practicable. However, any decisions must take account of the ability of

government to minimise any adverse price effects of the reform agenda so as to ensure that equity is maintained.

Chapter b 71

As a general rule, the necessity to meet any compensation needs due to the

imposition of the Goods and Services Tax are met by the large social security payment increases and the substantial personal income tax cuts proposed in the Coalition's package.

In deciding on the tax base, the Coalition faced a choice between a narrow base excluding items such as food and clothing (but requiring a much higher rate), or a broad consumption base including food and clothing to which a lower rate of tax could be applied to raise the same revenue.

The disadvantage of the first option is that high income groups receive substantially larger tax benefits in dollar terms from the exclusions than lower income groups. This is, therefore, a very inefficient and inequitable way of attempting to protect low income groups.

The advantage of the second option is that, even though more compensation is required, it can be more effectively and fairly targeted to those most in need than is possible with a blanket exemption.

Thus in the case of food, the Coalition believes that the fairest and most equitable method of treatment under the Goods and Services Tax is to make all food subject to tax and provide necessary compensation for any price increases through the social security, the substantial personal tax cuts and a new system of Goods and Services Tax Tax Credits.

As Bureau of Statistics data shows, the richest segment of Australian society spends around three times as much money on food as the poorest segment. To have "zero rated" food (for example) would be equivalent to a $3 tax cut for the better-off for each $1 tax cut for the less-well-off. That would hardly be fair or

equitable when the government can directly and fairly compensate for price increases in other ways.

However, there are some impediments to applying this general rule to every sector of the economy. As all countries that have introduced a Goods and Services Tax have found, there are often institutiona'. issues (such as Federal/State relations) and administrative arrangements that complicate the ability of a government to fairly and equitably treat all users of goods and services, or, in limited cases, major policy considerations which dictate an

alternate approach.

Often straightforward administrative problems can be dealt with only by exempting a particular type of activity from the Goods and Services Tax, for example the housing sector (as is noted below).

72 Chapter 5

Similarly, the provision of services by governments using taxpayers' money can

greatly distort the price signals in certain sectors, such as education and health (also noted below). In those cases, the simplest and fairest way to treat all consumers of those activities on an equitable basis is to completely exclude those activities from the Goods and Services Tax (ie zero rate them).

Another area often raised as deserving concessional treatment is the provision of goods and services to foreign tourists.

There are two arguments that are relevant in this context.

It is argued that, because foreign tourists are not Australian residents, the money they pay for goods and services in Australia should be treated in the same way as exports, that is zero rated.

However, an alternative view is that a Goods and Services Tax is a tax on domestic consumption in Australia. To the extent that foreign tourists consume goods and services in Australia, then they should be taxed, as Australian tourists are taxed in so many overseas countries, in conformity with the generally accepted international application of the destination principle.

The Coalition has decided on the latter approach and that overseas tourists will be able to purchase goods free of Goods and Services Tax if the supplier exports them from Australia (eg by mailing them to the tourist's overseas address). Further, through the network of duty free stores in Australia, zero rating can

be achieved by overseas travellers, including Australian residents, by using the existing sealed bag system.

The Coalition has decided that, where foreign tourists undertake expenditure in Australia on travel here it will be subject to the Goods and Services Tax. Similarly, where Australians purchase tour packages in Australia for travel overseas, it will be taxed under the Goods and Services Tax to ensure such travel is not placed at a competitive advantage relative to travel within Australia. However, airfares on overseas travel will be zero-rated.

Finally, it should be noted that the Australian tourism industry will benefit enormously from the Coalition's package. Over $100 million of sales tax which the industry now bears will be removed. More importantly, the effect of the petrol excise abolition on transportation costs will be wide-ranging and significant.

The payroll tax abolition will also reduce costs for both aviation and major tourist resorts.

Chapter 5 73

The following sections explain in some detail the rationale behind the

Coalition's decisions to zero rate or exempt certain activities from the Goods and Services Tax base, i.e. neither the input nor output is effectively taxed.

5.3.3 Rationale For Zero Rating Certain Activities

As explained above, zero rating is the setting of the Goods and Services Tax rate of a certain activity at zero per cent (cf to 15 per cent). What it effectively means is that no Goods and Services Tax at all is charged on the production of the activity because any Goods and Services Tax imposed on business inputs

will still be rebateable even though no Goods and Services Tax is paid on the final stage of production.

The following sub-sections explain the rationale for zero rating certain items of expenditure.

(i) Education and Health

As in the Hawke Government's 1985 Draft White Paper on the Reform of the Australian Taxation System, the Coalition also considers that the education sector requires special treatment with regard to a goods and services tax.

The Government noted in 1985 that:

"Education services are provided by both government and private organisations; government-provided services are essentially free while private organisations charge fees (and are frequently in receipt of a government subsidy). It is not possible to apply a [Goods and Services

Tax] directly to publicly-provided education services as there is no direct charge. Private education services could be included in the [Goods and Services Tax] base but to do so would no doubt be considered highly arbitrary and discriminatory."

We agree. Merely exempting fees placed on education services from the Goods and Services Tax would impose a burden on the private sector compared to taxpayer-funded education services.

The Coalition also believes that the same sort of case can arise for the health sector.

Again, as the Hawke Government said in 1985:

"Health services also receive substantial government funding and the consumer bears directly only a minor part of the total cost."

74 Chapter 5

The Coalition believes that the lack of clear price signals due to massive

subsidies throughout the entire health sector makes it inequitable to impose a Goods and Services Tax on health services.

In deciding whether to zero-rate or exempt the health and education sectors, the Coalition was concerned to avoid the problem identified by the Hawke Government in 1985 in regard to education services. In particular, if input taxes are not fully rebateable then private organisations involved in health or

education would face a significant tax burden compared to taxpayer-funded government institutions. The Coalition has therefore opted for zero-rating.

In addition, the community generally benefits from investment in health and education and, for that reason, some encouragement of those activities through the tax system is justifiable.

Indeed, the Coalition policy should see a fall in the absolute cost of health and education services. The price of services should fall because we will remove completely any sales tax from both education and health service provision. For example, it is not true that no sales tax is paid on medical services. In fact, the effective sales tax today on medical care and health expenses is around

1.4 per cent. The Coalition will abolish this tax, and not impose any tax in its place. Of course the abolition of the fuel excise and other taxes will also lower the costs of health and education services. We estimate that the price of health

and education services will fall by up to one per cent.

(ii) Government Provision of Non-Commercial Activities

No government in the world except New Zealand imposes a Goods and Services Tax on the government provision of non-commercial activities. This is because tax revenue cannot in reality be raised from the government itself and the imposition of the Goods and Services Tax simply involves unnecessary

"churning" and paperwork. The Coalition has therefore decided not to tax the provision of non-commercial activities by government. Therefore, the Goods and Services Tax will not be imposed on top of local government rates.

This is the same decision taken by the Hawke Labor Government in 1985 that:

"Services provided without charge by governments (such as public administration and defence) obviously cannot be subject to [Goods and Services Tax]."

(iii) Welfare, Charitable and Religious Institutions

Welfare, religious and charitable institutions play an important role in caring for the sick and disadvantaged in Australian society. Indeed, the functions of these institutions reflect closely those services provided without charge by government which, again, as noted above by the Hawke Government in 1985,

Chapter 5 75

"... obviously cannot be subject to [Goods and Services Tax]." As such, they are

not taxed directly now under the Hawke Labor Government's sales tax system although they pay wholesale sales tax indirectly on some of the goods they buy. It is the Coalition's commitment to give them genuine tax-free status.

The Coalition notes that it has had numerous submissions from welfare and religious institutions on this issue. It was their overwhelming advice to us that they thought the most equitable treatment of their organisations was to zero rate rather than receive government subsidies as they considered the latter

may unnecessarily bind them into accepting government social welfare policies with which they might disagree.

In view of the fact that welfare, charitable and religious institutions currently pay some sales tax on items that they buy, we estimate that their costs will be reduced by as much as 1.75 per cent.

(iv) Sale of a Business as a "Going Concern"

The sale of a business as a "going concern" has been zero rated as a matter of commonsense. As was decided in New Zealand, the transaction costs involved in implementing the Goods and Services Tax on• businesses, where in reality the purchaser will end up having the Goods and Services Tax rebated back to

them as a GST Tax credit almost straight away with no gains to the government, necessitates zero rating in this case.

(v) Exports

The zero rating of exports is an essential feature of all Goods and Services Tax systems around the world and is, in fact, one of th'e key reasons for introducing the Goods and Services Tax in Australia. That is to say, this taxation reform will substantially boost the international competitiveness of Australian industry.

5.3.4 Rationale For Exempting Certain Activities

As noted above, 'exemption" from Goods and Services Tax means that no Goods and Services Tax is paid on the sale of the good or service. However, the business is not eligible to claim a Goods and Services Tax credit for Goods and Services Tax paid on business inputs used to produce the exempt product. In this way, the relevant activity is effectively taxed except for the final sale price.

The following sub-sections explain the rationale for exempting certain activities from the Goods and Services Tax.

76 Chapter 5

(i) Residential rents, residential construction and other construction

No OECD country imposes a Goods and Services Tax on rental payments. As the Hawke Government's 1985 Draft White Paper noted:

"The [Goods and Services Tax] is a tax on consumption and so should logically fall on the services flowing from buildings rather than the purchase of the buildings themselves. That is, the tax should fall on actual rent payments in the case of tenants and imputed rent payments

in the case of owner-occupiers. The administrative and technical problems of taxing imputed rents are such as to rule out this approach.

Therefore, the Coalition has decided to exempt rents.

In respect of residential housing, the Coalition's principle is to encourage home ownership. To impose a full Goods and Services Tax, even with a rebate scheme, would contradict our policy objective. A fairer approach is to minimise the impact by input-taxing and introducing the generous first home owners

scheme outlined in this package. This general approach has the broad support of the industry and, given our objectives, is economically responsible.

In addition, and again as the Hawke Government's 1985 Draft White Paper noted, as a practical matter it would be difficult to distinguish between building materials for residential housing that might be taxed and building materials for commercial buildings and public works which would eventually be free of

taxation as business inputs.

As the Draft White Paper said:

"The approach of taxing buildings for private use and allowing businesses to purchase buildings tax free under licence is not without its administrative problems. One problem involves differentiating between the value of land and buildings in the case of buildings for private use. In addition, if rent payments are not taxed, there is a need to prevent

businesses or individuals from purchasing residential accommodation tax free under licence and renting it out to tenants while owner-occupiers must pay tax on their home purchases. This suggests that buildings

would need to be classified as residential or non-residential and all residential buildings taxed regardless of purchaser.

Defining residential buildings would raise administrative problems. For example, multi purpose buildings, including both residential and commercial accommodation, and buildings readily convertible from residential to non-residential uses, and vice versa, would pose problems."

Because of these administrative difficulties, the case arises for input taxing -that is exemption - of buildings. As the Hawke Government further noted in 1985:

Chapter 5 77

"Full input-taxing has the additional advantage of not requiring the

approximately 200,000 members of the building industry to be licensed, which reduces administration costs and opportunities for tax evasion. The main disadvantage of these approaches is that they impose a tax burden on industrial and commercial buildings and so raise the 'taxes on

taxes' problem. In general, however, the increase in the cost of a commercial or industrial building attributable to a tax on building inputs should, when amortised over the effective life of the building, result in a relatively minor increase in the operating cost and thus the price of the good or service produced by the occupier of the building."

As an alternative to exemption, zero rating housing would provide an unnecessary tax benefit to an industry which has in the past benefited from overly generous tax treatment. Again, as the Hawke Government noted in 1985:

"Exclusion of residential accommodation, or all buildings and building services, from the coverage of the [Goods and Services Tax] would present a major concession to owner-occupiers and result in a significant reduction in [Goods and Services Tax] revenue. Exclusion of residential accommodation only would also raise administrative problems of the kind referred to above."

Therefore, to avoid the administrative burdens involved in attempting to distinguish between building materials according to use, all building materials have been input taxed.

Building materials and products used in residential construction land development, home improvements and repairs and maintenance to existing dwellings will be input taxed.

Excluded from input taxing is the builder's margin and the contract labour element, which comprises around 50 per cent of the actual home cost excluding the land element.

A First Home Owners Scheme (FHOS) will be implemented to compensate for the effect of the Goods and Services Tax, both on newly constructed dwellings and any price effect on established dwellings (see Chapter 15).

The FHOS will be available to first home buyers of both new and established dwellings as both groups will face a similar price effect.

Access to the FHOS will be available to first home owners earning up to $40,000 pa household income. Up to that level, those eligible will receive $2,000 to offset the average cost impact imposed by the Goods and Services Tax.

78 Chapter 5

Those on higher incomes will be more than adequately compensated by large

personal income tax cuts. For more details on the FHOS see Chapter 15.

(ii) Financial services

As a general rule, no country in the world imposes a Goods and Services Tax on financial services. This is because financial institutions largely charge for their services in terms of the interest rate margin between their deposit and lending rates. As a result, for taxation purposes there is no readily identifiable value

for the services consumed by customers of financial institutions. Therefore, the Coalition has decided to exempt financial services from the Goods and Services Tax.

This is consistent with the Hawke Government's decision in 1985 which was that:

"Concessional treatment of financial services can be justified only on the grounds of practical difficulties in applying the BBCT. Input-taxing of such services would minimise the revenue loss involved but would result in a "taxes on taxes" problem as financial services are significant inputs

to industry. Revenue , considerations and the balance of the equity and efficiency arguments suggest that input-taxing of financial services may be the most appropriate treatment."

To date, we have been unconvinced by claims that a satisfactory administrative mechanism is available to permit a Goods and Services Tax to be imposed. We do note, however, that the European Community is considering proposals to allow financial institutions the option of charging Goods and Services Tax on services provided to business customers only. The Coalition is prepared to receive submissions on this issue, but again notes that to date we are unconvinced by these arguments.

(iii) Gambling and Lotteries

Gambling and lotteries are already subject to very high State taxation levels. In addition, as Dr Alan Tait of the International Monetary Fund and acknowledged world expert on Goods and Services Tax or VAT-type taxes notes in his book, Value Added Tax: Practice and Problems:

"Even where activities are identified, it is only where the state is the organiser that it is possible to levy VAT on a reliable basis. When private individuals are running the gaming tables or machines, the monitoring of income and expenses for tax purposes (for VAT or income tax for that

matter) is almost impossible." (page 106)

The gambling industry has made strong representations to the Coalition to be input-taxed, or exempt from the Goods and Services Tax.

Chapter 5 `79

Again, as the Hawke Government decided in 1985:

"Gambling may be input-taxed because of the difficulty in identifying and placing a value on the service that is being sold."

As a result, it has been decided that given the practical difficulties in defining just what part of gambling activities should be taxed and in lieu of abolishing those State taxes and charges, gambling and lotteries will be input taxed.

5.3.5 GST Rate Will Not Be Raised

It is the Coalition's firm commitment not to increase the Goods and Services Tax rate beyond 15 per cent and will embody this guarantee formally in legislation.

5.4 PAYROLL TAX

The Coalition will abolish payroll taxes. We will do this in such a way as to preserve the financial relativities between the States.

The arrangements we will put in place will:

be based on the principle of revenue neutrality, for both the Commonwealth and the States. Each State would receive an increase in untied grants from the Commonwealth to offset the payroll tax it had foregone;

ensure growth in these grants in line with growth in the Goods and Services Tax base; and

provide as much security for the grants as possible from interference from Commonwealth governments in the future.

These objectives can be met by specific new Commonwealth legislation. The legislation would provide that in the year of the abolition of payroll tax each State would receive a separately identified "Payroll Tax Abolition Grant" from the Commonwealth equal to the average of its total payroll tax collections over the three prior years, where prior year collections are escalated to dollars of the day by the CPI. (This averaging would be necessary, rather than linking grants to the latest year's collections, in order to prevent a State from raising its payroll tax rates dramatically in the year of transfer.)

The amount of each State's grant will be expressed as a percentage of the Goods and Services Tax base. This process would ensure that Payroll Tax Abolition Grants automatically grew in line with the growth in the Goods and Services Tax base.

80 Chapter 6

The States would not surrender any sovereignty to the Commonwealth through

these arrangements. If a subsequent Commonwealth government sought to cut or abolish Payroll Tax Abolition Grants (after amending the relevant Act), it would always be open to the 'States to re-introduce payroll tax.

The abolition of the payroll tax will create many tens of thousands of new jobs. Indeed, the Australian Chamber of Manufactures has estimated that the abolition of payroll tax will lead to the creation of 175,000 new jobs.

The decision to abolish payroll tax is explained in further detail in Supplementary Paper No 8.

5.5 PETROL EXCISE ABOLITION

The Liberal and National parties will abolish the refined petroleum products excise in conjunction with the introduction of the Goods and Services Tax on 1 October 1994.

This change will be accompanied by a comprehensive national road funding policy,

5.5.1 Petrol Excise

We will abolish the petroleum products excise, including the excise on petrol, diesel, aviation gas (used principally by light piston engine aircraft), fuel oil, heating oil and kerosene.

Based on the STATAX data in the attachments the price of petrol will fall by about 14 cents, diesel by around 13 cents and aviation gas by around 16 cents. But industry advice is that the price of petrol will fall by about 19 cents per litre and the price of diesel will fall by more than 25 cents per litre. On this basis the cost of motoring for a family travelling about 20,000km each year will be reduced by $390 per annum or $11.40 per 60 litre petrol tank.

The advantages to all members of the community from lower petrol prices will be considerable as they will flow through to most business and leisure activities.

The decision to abolish petrol excise is explained in further detail in Supplementary Paper No 9.

5.5.2 National Road Funding Policy

For too many years road users in Australia have been slugged by fuel excises, State franchise fees, registration charges, sales taxes and stamp duties.

Chapter 5 81

Data is patchy but the latest available figures (1987/88) indicate that revenue

collected by governments from road users by these various taxes exceeded government expenditure on roads by $2.6 billion.

Our tax reform measures ensure that road users are not treated as a source of general revenue raising. The abolition of the excise and its funding by the Goods and Services Tax ensures that fuel - the most pervasive of all business inputs - is not subject to an input tax. In addition, the sales tax on transport

equipment also will be abolished. In a large transport dependent country like Australia, the abolition of these taxes means that business can make its production and distribution decisions purely on the basis of resource costs, undistorted by taxation considerations, including by the Goods and Services Tax since businesses will receive a rebate on Goods and Services Tax paid on

their use of fuel.

Under the new Coalition Government road users will no longer be treated as a milch cow to fund government expenditures in areas outside roads. Equally, it would be irresponsible to allow road users to have a free ride at the expense of the general taxpayer by funding road expenditure entirely from general

revenue. The tax/expenditure package has been costed on the basis that, in effect, road expenditure by the Commonwealth (of approximately $1200 million per annum on both national and state roads) is funded from general revenue. The user pays approach to the provision of public infrastructure is however important in achieving a rational approach to microeconomic reform. A key part of that reform process is getting the price signals right for transport. Fully funding road costs out of general revenue does not achieve that objective.

At the present time the Federal Government and the States are in this process of negotiating a new approach to road funding. These negotiations are however hampered by the Commonwealth reliance on fuel excises as a source of general revenue and by the increased reliance of the States on fuel-related franchise fees as a milch cow for general revenue.

At the time of developing this proposal the final nature and design of the new arrangements is unknown. The Coalition therefore is not now in a position to assess the adequacy or otherwise of the new road user charges that are expected to be implemented next year or beyond.

The incoming Coalition Government, therefore, will request the newly established National Road Transport Commission to review a national system of road user charges to apply following the implementation of our tax reform package. The Commission would be guided by the need for the system of road user charges to be equitable, efficient and simple to administer. The Commission would be free to recommend that charges take any form or combination of forms.

82 Chapter 5

These changes to the arrangements for road funding will ensure that all

revenue raised by user charges will be spent on road maintenance and construction. The overall level of road user charges and road expenditures will be the responsibility of the National Road Transport Commission. Charges and taxes on road users and the level of expenditure on roads will no longer be

subject to the vagaries of the political or budget processes which have produced wild fluctuations in rates of charge and levels of expenditure in past years.

5.6 TOBACCO EXCISE

As noted in the Health Policy (Supplementary Paper No 3) the Liberal and National parties will increase the excise on tobacco by 25 per cent.

The medical community is strongly in favour of such action and has been campaigning for it for some time.

Indeed, the Australian Medical Association, in its 1990 pre-Budget submission to EPAC called for an increase in tobacco excise on health grounds stating that:

"...indirect taxes on tobacco [should] be increased with a view to an increase in prices, at the retail level, of about 40 per cent."

Peak health bodies including the Anti-Cancer Council of Victoria and the National Heart Foundation have endorsed the call for an increase in the excise levied on tobacco as a means of reducing the level of tobacco-related disease in the community.

5.7 OTHER EXCISE

The Liberal and National parties will abolish the automatic indexation of all remaining excises.

It has previously been argued that the automatic indexation of excises should be abolished in order that governments which propose increasing the tax burden on excisable products do so explicitly and publicly. Such an approach is in keeping with the Coalition's policy of transparency in taxation as is also

evidenced in our commitment to return the proceeds of `bracket creep" on personal income tax.

The decision to abolish automatic indexation of excises reflects our commitment to fighting inflation and will impose another important fiscal discipline. The policy will mean that revenue raised through this "taxation by stealth" will be foregone. However, if fiscal responsibility demands increases in revenue from

Chapter 5 83

excise then they would not be precluded, but it would need to be announced

and legislated, and thereby subjected to public scrutiny. The governments of the future will have to be up-front and truthful with the Australian people as to the necessity for any tax increase.

5.8 CUSTOMS DUTY

By the Year 2000, customs duty will have almost disappeared as a result of the Coalition's decision to reduce protection to negligible levels by the end of the decade in association with the microeconomic reform program we will implement. Thus a significant impost on domestic consumers and businesses will be removed, with very significant cost benefits to Australian consumers.

5.9 ADJUSTMENTS TO EXCISES, PAYROLL AND SALES TAX: SOME ILLUSTRATIONS FOR 15 PER CENT GST PACKAGE (NB See End -Note On Mark-up Assumptions)

Methodology

The tables below have been calculated on the basis of a number of specific assumptions (eg, relating to mark-up pricing policies) together, as far as possible, with results obtained from the STATAX model simulations. The specific assumptions used are as follows:

STATAX Output Used In Tables

1. In the case of alcoholic beverages, the net price change resulting from the removal of wholesale sales tax and the imposition of the GST (with excises unchanged) is driven by the STATAX model output and involves an average price increase across all alcoholic beverages of about 3 per cent. This is

assumed to be a reasonable proxy for price effects for all alcoholic beverages.

2. For tobacco products, the retail price, according to the STATAX model, increases by 24.1 per cent as the combined result of (i) an assumed 25 per cent increase in the excise on tobacco and (ii) a 15 per cent GST.

Other Assumptions

1. In cases where measures are needed to convert excise rates to normally-consumed quantities (eg a glass of beer or wine, or a nip of spirits or a packet of cigarettes) we have used generally-accepted standard quantities common in the relevant industry.

84 Chapter 5

2.

For starting prices for all products we have used current average prices generally applicable in the major State capitals.

3. The assumptions underlying the figures below include constant percentage markups at all levels of the production/distribution chain before and after tax changes.

A. PETROLEUM PRODUCTS

A.1 MOTOR SPIRIT (a)

Final Consumers (ents/litre)

Business Users (cnts/litre)

1. Present Excise duty 25.8 25.8

revenue/litre

2. Proposed excise duty 0 0

revenue/litre

3. GST on motor spirit (b) 7.0 0(c)

4. Total indirect tax post-GST 7.0 0

(2+3)

5. Net Federal tax change (4-1) -18.8 -25.8

Notes: (a) These examples assume constant percentage mark-ups from one production stage to the next.

(b) Assumes initial retail price is 67.5centsflitre and falls by 20.6 per cent to 53.6cents/litre. (c) GST paid on business inputs is 100 per cent refundable to the business user: in effect, tax is passed on to the final domestic consumer.

Chapter 5 85

A.2 DIESEL (a)

Consumers (ets/lt)

Farming (cta/lt)

Mining (ctsflt)

Other Business (cts/lt)

1.Present duty 25.8 25.8 25.8 25.8

2,Excise rebate 0 25.8 23.4 0

3.Net duty (1-2) 25.8 0 2.4 25.8

4.Proposed duty 0 0 0 0

5. Excise rebate 0 0 0 0

6.Net duty (4-5) 0 0 0 0

7.GST(b) 6.6 0(c) 0(c) 0(c)

8.Total Proposed Tax (6+7) 6.6 0 0 0

9.Federal Tax change (8-3) -19.2 0 -2.4 -25.8

Notes: (a) These examples assume constant percentage markups from one production stage to the next. (b) Assumes initial retail price for diesel is 63.5 cents/litre and falls by 20.6 per cent to

50.4 cents/litre. (c) GST paid on business inputs is 100 per cent refundable to the business user.

A.3 AVIATION GAS (a)

Final Consumers (cnts/litre)

Business Users (cnts/litre)

1. Present Excise duty 27.1 27.1

revenue/litre

2, Proposed excise duty 0 0

revenue/litre

3. GST on motor spirit (b) 8.1 0(c)

4. Total indirect tax post-GST 8.1 0

(2+3)

5. Net Federal tax change (4-1) -19.0 -27.1

Notes: (a) These examples assume constant percentage mark-ups from one production stage to the next. (b) Assumes initial retail price is 78 cents/litre and falls by 20.6 per cent to 61.9cents/litre.

(c) GST paid on business inputs is 100 per cent refundable to the business user.

86 Chapter 5

B. ALCOHOLIC BEVERAGES

B.1 BEER (a)

Final Consumers (cts/glass)b

1. Present excise on beer @$14.00/litre 19.6

of alcohol over 1.15 per cent) 2. Present wholesale sales tax (d) 15.2

3. Total present tax (1+2) 34.8

4. Proposed beer excise 19.6

5. Proposed GST 20.2

6. Total proposed tax 39.8

7. Federal tax change (6-3) +5,0

Notes: (a) These examples assume constant percentage mark-ups from one production stage to the next. (b) Based on 285ml glass. (c) Assumes beer at 4.9 per cent alcohol by volume.

(d) Assumes present price/glass of $1.50, mark-up to retail of 65 per cent and sales tax rate of 20 per cent. (e) Assumes post-GST retail price (tax-inclose) of $1.55,

B.2 WINE (a)

Final Consumers (cents/glass)(b)

1. Present wholesale sales tax (c) 15.2

2. Proposed GST (d) 20.2

3. Federal tax change (2-1) +5.0

Notes: (a) These examples assume constant percentage mark-ups from one production stage to the next. (b) Based on 140ml glass. (c) Assumes present price/glass of $1.50, mark-up to retail of 65 per cent and sales tax rate of

20 per cent. (d) Assumes post-GST retail price (tax-inclusive) of $1.55.

Chapter 5 87

B.3 BRANDY (a)

FINAL CONSUMERS (cents/nip)(b)

1 Present excise on brandy (@ $27.85/litre of alcohol) 31.1 (c)

2 Present wholesale sales tax (d) 20.2

3 Total present tax (1+2) 51.3

4 Proposed brandy excise 31.1

5 Proposed GST (e) 26.9

6 Total proposed tax (4+5) 58.0

7 Federal tax change (6-3) +6.7

Notes: (a) These examples assume constant percentage mark-ups from one production stage to the next. (b) Based on 30 mil nip. (c) Assumes brandy at 37.2 per cent alcohol by volume. (d) Assumes present price/nip of $2.00, mark-up to retail of 65 per cent and sales tax rate of

20 per cent. (e) Assumes pait-GST retail price (tax-inclusive) of $2.06.

88 Chapter 5

B.4 OTHER SPIRITS - GENERAL EXCISE RATE (a)

FINAL CONSUMERS (cents/nip)(b)

1 Present excise (® $32.62/litre of alcohol) 36.7 (c)

2 Present wholesale sales tax (d) 20.2

3 Total present tax (1+2) 56,9

4 Proposed brandy excise 36.7

5 Proposed GST (e) 26.9

6 Total proposed tax (4+5) 63.6

7 Federal tax change (6-3) +6.7

Notes: (a) These examples assume constant percentage mark-ups from one production stage to the next. (b) Based on 30 mil nip. (c) Assumes spirits at 37.5 per cent alcohol by volume. (d) Assumes present price/nip of $2.00, mark-up to retail of 65 per cent and sales tax rate of

20 per cent. (e) Assumes post-GST retail price (tax-inclusive) of $2.06.

Chapter 6 89

B.5 LIQUEURS - GENERAL EXCISE RATE (a)

FINAL CONSUMERS (cents/nip)(b)

1 Present excise (@ $32.62/litre of alcohol) 26.1 (c)

2 Present wholesale sales tax (d) 30.3

3 Total present tax (1+2) 56.4

4 Proposed excise 26.1

5 Proposed GST (e) 40.3

6 Total proposed tax (4+5) 66.4

7 Federal tax change (6-3) +10.0

Notes: (a) These examples assume constant percentage mark-ups from one production stage to the next. (b) Based on 20 mil nip. (c) Assumes spirits at 40 per cent alcohol by volume. (d) Assumes present price/nip of $3.00, mark-up to retail of 65 per cent and sales tax rate of

20 per cent. (e) Assumes post-GST retail price (tax-inclusive) of $3.09.

90 Chapter 6

B. 6 SPIRITS n. e. c. (a)

FINAL CONSUMERS (cents/nip)(b)

1 Present excise (@ $33.49/litre of alcohol) 26.8 (c)

2 Present wholesale sales tax (d) 30.3

3 Total present tax (1+2) 57.1

4 Proposed excise 26,8

5 Proposed GST (e) 40.3

6 Total proposed tax (4+5) 67.1

7 Federal tax change (6-3) +10.0

Notes: (a) These examples assume constant percentage mark-ups from one production stage to the next. (b) Based on 20 mil nip.

(c) .Assumes spirits at 40 per cent alcohol by volume. (d) Assumes present priceinip of $3.00, mark-up to retail of 65 per cent and sales tax rate of 20 per cent. (e) Assumes post-GST retail price (tax-inclusive) of $3.09.

Chapter 5 91

C.1 CIGARETTES

FINAL CONSUMERS (cents/nip)(b)

1 Present excise on tobacco (0 $51,72/kg of tobacco) 93.1

2 Proposed excise 116.4

3 Proposed GST (c) 59.1

4 Total proposed tax (2+3) 175,5

5 Federal tax change (4-1) +82.4

Notes: (a) Based on packet of 25 cigarettes. (b) Assumes tobacco weight/ packet of 18gm125s. (c) Assumes present price/packet of $3.65 increases by 24.1 per cent to $4.53 post-GST.

ENDNOTE: The results in the tables set out above depend critically upon the assumptions made about the mark-ups adopted throughout the production/distribution chain. As in the

Government's 1985 Draft White Paper (DWP), we have assumed that retail and wholesale mark-ups remain constant in percentage terms. (See DWP, page 138-9, paragraph 13D.7)

Alternative assumptions are possible. For example, one might assume fixed dollar mark-ups. That would preserve the net value of wholesaler/retailer margins, rather than implying reduced dollar margins. An identical result would apply if it was assumed that margins were fixed in percentage terms but were calculated on the relevant tax-exclusive bases. In both cases, the price-reducing results of the proposed tax changes would be smaller than shown above. As a result, the tax burden under the new tax regime would also be higher than shown above.

Publications

Reform of the Australian Tax System, Draft White Paper, June 1985

Centre of Policy Studies, Monash University, "Some Issues in the Consumption Tax Debate", Paper prepared for the Business Council of Australia, September 1990

Report of the Committee for Review of Export Market Develoment Assistance, 'Australian Exports, Performance obstacles and issues of assistance", July 1989

Neil Warren, "A Goods and Services Tax for Australia", Australian Tax Research Foundation, Research Study No 11, 1990

Industries Assistance Commission, "Certain Petroleum Products • Taxation Measures", Report No 397, November 1986

Industries Commission Annual Report 1989/90

92 Chapter 5

New South Wales Tax Taskforce, "Review

of the State Tax System", August 1988

R Chapman and D Vincent, "Payroll Taxes: An Investigation of the Macroeconomic and Industry-Level Effects of Their Removal," August 1985

Australian Medical Association, "Pre-Budget Submission to the Economic Planning Advisory Council", July 1990

Chapter 5 93

6. TAX AVOIDANCE AND EVASION

6.1 INTRODUCTION

One of the major benefits flowing from the Liberal and National Parties' tax reform package is the clamp down on tax minimisation and avoidance opportunities to ensure that Australia's tax system is much fairer.

Many Australians believe that our tax system is unfair. Honest Australians observe:

they pay marginal rates of 38 per cent on average incomes while wealthy individuals and companies are able to minimise their taxes;

a thriving cash economy which is not taxed;

the excesses of high-flying entrepreneurs through the 1980s who went on a spending spree using large-scale • debt financing in a high inflation environment and seemed to be able to pay almost no tax;

social welfare rorts, paid for by excessive tax collections from PAYE taxpayers.

The Liberal and National Parties' approach to this problem is twofold. Firstly, we are committed to lowering the overall taxation burden on Australians and making the system fairer, thereby promoting greater tax compliance. In fact, under our policy 95 per cent of taxpayers will face a marginal income tax rate of 30 cents in the dollar or less.

Secondly, the result of our changes to the tax system will remove many of the incentives and opportunities for Australians, many of them high income earners, to avoid paying their fair share.

The specific measures include:

Subjecting the black economy to a tax on expenditure.

Aligning the top personal income tax rate with the corporate tax rate to remove the incentive for individuals to incorporate purely for tax avoidance reasons.

Aligning the Fringe Benefits Tax rate with the corporate tax rate.

Changing the superannuation rules to lessen the capacity for high income earners to use superannuation as a tax shelter.

Chapter 6 95

Tightening the guidelines relating to the tax deductibility of research and,

development expenditure.

Abolishing the wholesale sales tax, which by its complexity is open to abuse, and replacing it with the Goods and Services Tax, which by design is largely self-policing.

6.2 THE BLACK ECONOMY

The burden on PAYE taxpayers is significantly increased by the existence of a substantial cash economy which evades income tax. Ensuring that the evasion of tax by this "black economy" is minimised, is one of the objectives of our tax reform package.

The Treasury Draft White Paper on taxation reform defined the black economy as:

"The aggregate of unrecorded economic activity which escapes measurement and tax assessment due generally to its reliance on cash transactions but also for other reasons such as illegality. "z

The main components of the black economy include income:

undeclared or understated by the self employed (e.g. by the understatement of sales/income and the overstatement of expenses) and simply creamed off in cash from the till;

in the form of cash wages (including substantial over-award cash payments as exposed in the NSW Building Industry Royal Commission);

from moonlighting (e.g. by taking a second job under a false name);

from social security fraud;

from payments in kind (the swapping of goods and services);

from drugs, other crime and from prostitution.

The tax revenue lost from the black economy is almost entirely income tax revenue.

Clearly the greater the income tax burden, the more complex the tax system and the higher the costs of compliance, the greater the incentive for individuals to participate in tax avoidance and evasion by seeking to be paid in cash.

The black economy is, by definition, of unknowable size. However, there have been attempts overseas to establish a measurement of its size in any particular economy.

96 Chapter 6

For example, in 1990 the Deputy Assistant Secretary for Economic Policy in the

US Treasury, Bruce Bartlett, stated that:

"... the latest estimate from the Internal Revenue Service of the revenue lost to the underground economy is $84.9 billion for 1987. This suggests an underground economy of roughly 10 per cent of GNP'2

The New Zealand Government did not publicly release its estimates of the size of the black economy prior to the introduction of its Goods and Services Tax. However, the NZ Government was surprised by the number of businesses which registered for the Goods and Services Tax (around 300,000), which far exceeded

expectations (around 180,000).

In an assessment of the black economy in Australia, the Federal Parliamentary Research Service advised that there is a somewhat established view that the size of the economy represents around 10 per cent of the total Gross Domestic Product.

This estimate is supported by the Treasury Draft White Paper of 1985 which implied a cash economy base of at least $19 billion. Adjusted for inflation, this indicates a minimum cash economy of around $35 billion in today's dollars.

Everyday experience and the abundance of anecdotal evidence points to the reality of a substantial black economy.

Anybody who has had to get repairs done to their house or has engaged in any type of business activity has been confronted at some time by the existence of the black economy.

If we assume that the 10 per cent figure is near correct, Australia's black economy is just short of $40 billion per annum.

Commonwealth government revenue suffers greatly from the loss of collections from this hidden economy. A black economy estimated at 10 per cent of GDP indicates losses in revenue in the order of $9 billion.

The acknowledged growth of the black economy over the past 20-30 years has been largely due to the fact that there is simply more incentive to conceal transactions. The main contributors to this have been a higher tax burden and increasing government regulations.

Obviously, the Goods and Services Tax will not be a miracle cure to totally expunge illegal transactions in the black economy - but it will force black market operators to pay tax just like everybody else when they buy items on which the Goods and Services Tax is charged.

As noted elsewhere, we have made our Goods and Services Tax calculations based on a black economy of around 5 per cent of the size of the GST preferred base. This is a very conservative estimate, putting the black economy at probably only half its size.

Chapter 6 97

6.3 ALIGNING TAX RATES

One of the major anomalies in the present business tax system is the fact that high income individuals pay tax at a higher rate than companies.

In general, the wider the gap between the top personal income tax rate and the corporate rate, the greater the incentive to incorporate in order to minimise the tax liability.

The 1985 Draft White Paper stated:

"The lack of synchronisation between the maximum marginal rate on personal income and the rate of tax levied on companies... [means that] wealthier taxpayers in control of private companies are in a position to reduce their total tax burden by retaining income within

the corporate area... where there are large retentions of company income, top marginal rate taxpayers are therefore not infrequently taxed less than intended."

In recent years, the Labor Government's tax reforms have opened a gap between the top personal marginal rate of 47 per cent and the corporate rate of 39 per cent. This has prompted many high income tax payers to opt to pay tax through corporate structures. In fact, extrapolating recent tax data for taxable incomes

exceeding $100,000 suggests that over half these taxpayers accepted the Labor Government's generous offer to pay less tax.

The equalisation of the top marginal and corporate tax rates as proposed by the Liberal and National Parties' will eliminate this distortion.

We have no better authority for this than the ex-Treasurer, the Member for Blaxland, who said in 1985:

"They also make possible the vital innovation of aligning the top personal income tax rate with the company tax rate. In a stroke this will make a whole host of tax avoidance devices futile. i°

6.4 ELIMINATING FRINGE BENEFITS TAX RORTS

Under the existing income tax arrangements there is an incentive for employees and employers to structure remuneration packages so as to take advantage of the gap between the fringe benefits tax rate (48.25 per cent) and the corporate tax rate (39 per cent). Our decision to lower the fringe benefits tax rate and align it with

the top corporate rate will significantly close this loophole.

98 Chapter 6

6.5 SUPERANNUATION - NO LONGER A TAX SHELTER FOR THE

WEALTHY

One objective of our approach to superannuation is to reduce the ability of high income earners to use superannuation as a highly attractive tax shelter. Labor's policies are inequitable in that they provide extremely generous tax benefits to upper income groups who are least in need of such assistance.

The present taxation arrangements have been attacked by the Australian Council of Social Services as discriminating against low income earners. ACOSS points out that the present arrangements provide a tax concession of 33 cents in the dollar for high income earners compared with 6 cents a dollar for low income earners.

Our proposals will significantly reduce the level of subsidy to high income groups. A maximum rebate of $1,500 a year for contributions of $6,000 a year will be available to all. This $6,000 a year represents 30 per cent of the income of a $20,000 a year wage earner, 15 per cent of the income of a $40,000 a year wage

earner and only 10 per cent of the income of a $60,000 a year wage earner.

These changes will promote greater equity in the Australian tax system and restore the proper objective of superannuation as a vehicle to assist all Australians in saving for their retirement.

6.6 THE R&D TAX INCENTIVE

Under the provisions of the Industry Research and Development legislation, "financially engineered" R&D syndicates have registered for the purpose of devising artificial arrangements to obtain the present 150 per cent tax deduction benefit.

Usually they are structured so that the investors obtain a guaranteed return, and the parties giving the guarantee are able to fund the research out of the profits they have received from undertaking the research for the investors.

These syndicates are not subject to the discipline of the market place (which is the case for companies claiming the 150 per cent deduction in the normal manner) as neither the researcher nor the investor are at risk. Each will be either making a

profit or at least breaking even.

The Liberal and National Parties will introduce anti-avoidance provisions to ensure that investors in R&D syndicates are treated no differently from companies claiming under the R&D tax incentive in the normal way. This will ensure that such syndicates are subject to the discipline of the market place.

The introduction of an anti-avoidance provision, while intended mainly to deal with syndicates, would also prevent any other artificial arrangements designed to take advantage of the 150 per cent deduction (which falls to 125 per cent in

Chapter 6 99

July 1993). It would encourage the emergence of genuine R&D syndicates where

the investors were making hard commercial decisions to invest on the basis of the potential value of the technology rather than profits resulting from financial engineering.

References

1. Reform of the Australian Tax System, Draft White Paper, June 1985

2. Bruce Bartlett, Deputy Assistant Secretary for Economic Policy, US Treasury, Washington DC, 1990

3. P J Keating, Parliament, 19 September 1991

100 Chapter 8

7. NATIONAL SAVINGS STRATEGY

7.1 KEY DECISIONS

A Liberal/National Government's national savings strategy will involve the following separate but interconnected initiatives:

a commitment to price stability to bolster saver confidence (see Chapter 8);

a tax/expenditure program to boost public sector savings by restoring the integrity of the Commonwealth Budget;

incentives to save as a result of large cuts in personal income tax rates which are fully funded (see Chapter 2);

a broadly based goods and services tax helping to shift the balance of taxation away from income and towards consumption (see Chapter 5);

• better targeted government welfare and expenditure to encourage greater self reliance (see Chapter 16);

• incentives for long-term savings built on a new voluntary superannuation scheme that will encourage Australians, especially those in the lower income scales, to make their own provision for retirement in co-operation with their employers;

introduce a new system of Retirement Savings Accounts which can be provided by financial institutions, banks and building societies with the same superannuation tax concessions as apply to superannuation funds. These can also be used by part-time, temporary and casual workers and dependent spouses.

incentives for shorter term savings for all Australians irrespective of income built on a new Tax Free Savings scheme (TFS) where interest income on all new savings, up to a limit of $1,000 a year for single taxpayers and $2,000 a year for married couples, will attract a rebate of 30 cents in the dollar;

this means at current interest rates over four million married couples with children who have taxable incomes of less than $50,000 will pay no tax on the interest from income from the first $25,000 of new net savings;

a further one million single taxpayers earning $50,000 or less need pay no tax on the interest income from the first $12,500 of new net savings.

Chapter 7 101

7.2 AUSTRALIA'S SAVINGS PROBLEM

7.2.1 Savings And Investment Trends

Australia's national savings rate was much lower in the 1980s than in the two previous decades and as a result there was a marked deterioration in the current account deficit. The rate of borrowing from overseas (shown as negative net lending in Table 7.1 below) more than doubled in the 1980s.

TABLE 7.1

NATIONAL SAVINGS IN DECLINE

Averages for Latest Year

1960s 1970s 1980s (1990/91)

(Percentage of GDP)

National Savings of which:

24.5 23.7 20.0 17.8

- Public Sector 7.7 5.2 3.0 4.0

- Households 6.0 8.1 5.2 4.1

- Other Private 10.8 10.4 11.8 9.7

Total Investment (a) of which:

26.8 24.9 24.8 22,0

- Public fixed 8.2 7.6 6.8 6.0

- Private fixed 17.4 16.7 17.6 15.8

Net Lending to Overseas (b) -2.3 -1.2 -4.8 -4.2

Source: ABS Cat No 5206.0

(a) Total investment includes increase in stocks and statistical discrepancy.

(b) Net lending to overseas equals national savings less total investment. It differs slightly from the current account balance by the net amount of re-invested earnings.

The decline in national savings was largely due to a downward trend in public sector savings since the early 1970s and reflected undisciplined government spending. Although there was a temporary improvement in the late 1980s in public sector savings from the abysmally low levels in the early years of the Hawke Government, this improvement has been more than reversed recently.

The downward trend in the rate of public capital expenditure since the mid-1970s highlights the disproportionate reliance of cutting capital rather than recurrent

102 Chapter 7

expenditure when efforts have been made to address the deterioration in Federal

and State budgets.

Household savings increased a good deal in the first half of the 1970s and sustained relatively high levels in the second half of that decade. Subsequently, the household savings rate (expressed as a percentage of GDP) has halved and is currently at record low levels.

This has occurred despite markedly higher personal savings in the form of superannuation. For example, savings through life insurance and superannuation funds represented 4.5 per cent of GDP in 1989/90 as against 2.1 per cent ten years earlier.

A number of factors have contributed to the slide in household savings, particularly since 1983/84. These include:

• high inflation coupled with high marginal tax rates which has encouraged bringing forward consumption and gearing up to invest in assets perceived as inflation hedges;

• the reduction in the public sector borrowing requirement between 1984/85 and 1988/89 which was achieved primarily through higher taxation and higher government charges;

• increased dependency on social security, especially by middle income earners. The fostering of dependence on social security provides a considerable disincentive to save for unforeseen liabilities; and

• the introduction of occupational (and more recently compulsory) superannuation which fosters the notion that there is little need to accumulate savings otherwise for retirement.

The decline in household savings was partly offset in the 1980s by an increase in other private savings (mainly by corporate enterprises). However, this improvement has been more than eliminated over the past two years.

The rate of private capital investment fell in the 1970s but this was reversed in the 1980s. There was a sharp burst in private investment in the late 1980s, a good deal of it into speculative building. Subsequently, the investment rate has fallen to the lowest levels of the last thirty years. Indeed, it is this slump in investment which explains the marked improvement in the current account deficit in 1990/91, as both private and public sector savings have also fallen. When the

economy recovers, the current account deficit will deteriorate unless an expansion in business investment is matched by an increase in national savings.

Chapter 7 103

7.2.2 Balance Of Payments/Foreign Debt Problems

Except for the past two years, the Hawke Government's economic policies have driven the Australian economy at too fast a pace relative to our constrained production capacity. Demand has therefore exceeded production by a sizeable margin over the period and spilled over into imports.

These policies have led to the trade balance being in deficit throughout most of the past eight years in contrast to surpluses during the 1970s. As a result, the current account deficit has averaged 4.8 per cent of GDP since 1983 compared with 2.5 per cent of GDP over the previous two decades.

The need to finance these substantial current account deficits has resulted in Australia's net foreign debt exploding from 11 per cent of GDP when Hawke came into office in 1983 to currently a massive 35 per cent of GDP.

If our chronic balance of payments problem is not successfully addressed, then net debt to GDP will continue to escalate over the 1990s. Of course, a crisis could come sooner as the rest of the world may refuse to finance our excessive spending. At the very least, overseas investors will demand higher real rates of interest as

the debt continues to mount.

CHART 7.2

REAL SHORT—TERM INTEREST RATES per cent per annum

pa real rate

I Q

Q

-0

-IQ

Net debt % GDP

1960 1965 1970 1975 1980 1985 1990

50

40

30

20

10

0

"" Australia — U.S.A . Japan M External Debt

The chart above shows very clearly the higher premium overseas investors have already built into our interest rates since 1984.

104 Chapter 7

Real interest rates in Australia have averaged around 3 per cent higher than that

of our major trading partners over the past seven years. These real interest rates have been sustained even in the depths of the current recession

Whether they realise it or not, all Australians are therefore paying higher interest rates on their houses and durable goods as a result of our national debt. On an average house loan a 3 per cent premium amounts to $2,500 a year.

7.2.3 The Debt Hurdle

CHART 7.3

r-n r

THE DE HURDLE

WHAT WE HAVE DONE BEFORE AND WHAT WE NEED TO DO NOW

a sustained contribution of :3.; : o f GDP i s required

R

What e hero to ethic ? . it luturc

4

i ! `

7

.5. 3

r

ban .e ha .000.,6 to the peat

o

^•^a^ 7

-2/

^t

70 73 7 0 79 132 85 88 9t

QUAR`T'ERS

`—'—' Net Exports -'"°' Required Hurdle

FIVE. YEAR MOVING AVERAGE

We need to dramatically improve our trade performance if we are to stabilise and

reduce debt as a percentage to GDP and begin to wind back real interest rates.

Chapter 7 1 05

50

40

30

20

10

0

)0

CHART 7.4

WHAT IF WE DO SOMETHING? A SCENARIO FOR STABILISING DEBT

NET DEBT TO GDP 70

FISCAL, YEARS

'— 13.\SE CASE DOING SOMETHING

SOUFCE: SEE SCENARIOS IN CHAPTER

This will not be an easy task. In order to stabilise debt, we need to achieve

growth in net exports of 3.75 per cent over a sustained four-year period -something we have not achieved in the last 25 years.

If, as a nation, we save more and consume less, then we will have more of our production available to export and we will import less. But our industries must become internationally competitive if we are going to be able to successfully transfer resources to export industries and import-competing industries. The key

to success is boosting productivity.

Becoming internationally competitive requires major structural reforms and, most i mportantly, lifting the percentage of GDP we spend on private business investment.

7.2.4 Fundamental Economic Relationship

It is very important to understand the relationship between the current account balance and private savings, investment and the Public Sector Borrowing Requirement (PSBR).

Current Account Deficit = Private Investment minus Private Domestic Savings plus Public Sector Borrowing Requirement

106 Chapter 7

As a nation, we need to lift private investment to boost production and

employment. However, if private investment increases and private savings and the PSBR remain unchanged, then the current account deficit will deteriorate.

Table 7.5 provides just one illustration of the dimensions of Australia's growing saving-investment imbalance from an international perspective:

TABLE 7.5

NATIONAL SAVING LESS TOTAL INVESTMENT AS PROPORTION OF GDP( %)

1960s 1970s 1980s

United States 0,8 0.2 -1.8

Japan -0.1 0.6 2.1

Germany 0.7 0.7 1.8

France 0.9 0.2 -0.5

United Kingdom -0.3 1.5 0.9

Italy 1.5 0.2 -l.1

Canada -2.2 -1.6 -1.3

Australia -2.3 -1.2 -4.8

* Figures for 1980s are averages to 1987

Source: Dean A, Durand M, Fallon J, and Hoeller P, Savings Trends and Behaviour in OECD Countries, 1989, OECD Department of Economics and Statistics Working Papers, No 67.

The upshot of all this is that the need to lift business investment puts greater pressure on boosting savings and reducing government expenditure if we are to reduce the current account deficit.

7.3 LABOR'S RESPONSE TO THE SAVING PROBLEM

The Hawke Government has at no time attempted to comprehensively address our national savings problem. Instead it has resorted to piecemeal and ad hoc decisions, particularly in relation to superannuation/retirement income policies.

More importantly, they are fundamentally flawed in terms of the vital task of promoting national savings.

The Government has not been prepared to make the firm commitment to price stability which is necessary to give people confidence that their savings will not be eroded by inflation.

Chapter 7 107

Also, Labor has created a massive public "safety net" which extends beyond low

income earners and therefore reduces the need for average Australians to save, to look after their own needs, and to provide for themselves in retirement.

Since the 1985 Tax Summit when the Prime Minister proposed, and then sabotaged, efforts to introduce a broadly based consumption tax, the Government has consistently refused to countenance a re-shaping of the tax system to place more emphasis on consumption rather than income taxation.

For a time, when Government revenues were buoyed by the speculative boom of the late 1980s, the Government sought to portray the Commonwealth Budget surplus as a mechanism for boosting national savings. But this strategy ignored the induced fall in private sector savings which flowed from its fiscal measures and the fact that the public sector surpluses were likely to be ephemeral in the

absence of other policy adjustments.

The recession has caused the Government to abandon that strategy and it has progressively eased fiscal policy. Indeed, they now quite openly embrace new spending initiatives without funding them (eg, the November 1991 Economic and Employment Statement). The only standards they maintain in this regard are

double and we expect they will have the gall to claim that this package is unfunded. The Government is now facing a public sector borrowing requirement of four per cent in 1991/92 and, even with the cyclical pick-up in activity in prospect, the public sector seems likely to remain a substantial net borrower in 1992/93 and beyond.

Within the private sector, Labor's income taxation system has selectively provided significant advantages to particular forms of saving. Share income through dividend imputation allows higher income earners to enjoy a lower effective tax on the "franked" dividends from those holdings. Property investments have historically moved at least in line with inflation but are subject only to a capital gains tax on real gains. And superannuation concessions are estimated to have cost $3.35 billion in 1989/90.

In each case, the benefits available flow principally to higher income earners who have been able to take advantage of the share market, property market and superannuation. The incentive to move funds into these favoured forms of saving was enhanced in the 1980s by the combination of high inflation and the potential

to negatively gear asset purchases (ie to borrow large amounts and charge the interest cost against the income flow generated by the asset, including its potential for real capital gain).

It was this volatile mix of tax concessions favouring those higher income earners with a capacity to borrow that drove the asset price boom of the late 1980s. It was a period of excess which saw many higher income earners gain at the expense of the average wage earner and the average PAYE taxpayer.

108 Chapter 7

Since coming to office, Labor has managed to turn superannuation into an

extremely complex, unfair and unattractive system, particularly for those on low to middle incomes.

When Labor came to office there was just one tax on superannuation - now there are six:

• a 15 per cent tax on employer contributions;

• a 15 per cent tax on the investment income of funds;

• a 16.25 per cent tax on lump sums;

• a 21.25 per cent tax on lump sums for those under 55;

the maintenance of the pre-1983 tax arrangements; and

• a capital gains tax on superannuation fund assets.

In addition, Labor has introduced the concept of Reasonable Benefit Limits (RBLs), which establishes the maximum benefit that can be funded through a superannuation scheme- on a concessional basis depending on an individual's level of salary. The system is complicated and costly to administer.

The treatment of superannuation concessions for the self employed has also changed.

These superannuation benefits have been blatantly skewed in favour of the wealthy.

A person paying the top marginal personal income tax rate (including the Medicare levy) gets a tax break of 33.25 cents in the dollar (48.25 per cent less the 15 per cent superannuation contribution levy), while a person on the lowest marginal tax rate gets a benefit of just 5 or 6.25 per cent (depending on whether

the taxpayer pays the Medicare levy).

What has happened under the Hawke Government, therefore, is that middle and lower income earners are cross-subsidising the more wealthy in our society, most of whom would save in any event. This is an inefficient and inequitable way of

boosting national savings and it obviously hasn't worked. Indeed, superannuation is being rorted by the wealthy.

High income, self-employed people are able to shelter the bulk of their income from tax by contributing to a superannuation fund if they have sufficient RBL capacity and, of course, this can be engineered. For example in the 1990-91 tax year, individual tax deductions in respect of superannuation contributions in

excess of $100,000 were widely claimed by professional and other groups, resulting in tax benefits in excess of $33,000 a year to some individuals.

Chapter 7 109

Young people really have no incentive to take up superannuation. Labor's policy

of compulsory superannuation contributions is also affecting young people who want to buy their own homes as they will have fewer funds available than otherwise to help them achieve home ownership. The irony of the current arrangements is that they receive smaller taxation subsidies for their

superannuation contributions than those higher income taxpayers, many of whom already own their own houses.

The introduction of award superannuation in 1985 was supposed to facilitate extensive superannuation coverage of the workforce. Clearly it has not done so.

According to latest ABS surveys of major labour costs in Australia, the percentage of employees covered by superannuation is now just below 55 per cent. But even this figure masks an enormous disparity between the public and private sectors. Coverage in the private sector (where less than one-third of the workforce is unionised) is 40.6 per cent compared with 90.4 per cent in the highly unionised public sector, where the average cost per employee covered is more than

50 per cent higher.

Under the auspices of the ACTU, award superannuation has been treated as an industrial relations issue and not one of retirement income. The ACTU/Labor drive for award superannuation lacks focus, is clearly not productivity-based (as was its original intention), and takes no account of an individual employer's

capacity to pay or the rights of the individual as to where their funds should be invested.

Of the 284 superannuation awards handed down up to late 1989, 162 of them offered no freedom of choice, directing employer contributions to a single fund and nearly always to union-sponsored schemes. A further 90 provided a choice only between a union fund and a pre-existing employer fund.

There have also been other shifts in savings behaviour.

Contributions to life and insurance funds have risen from 4 per cent to over 9 per cent of total household disposable income. But the total household saving ratio has fallen from 9 per cent to 6 per cent, implying a large fall in other forms of saving (see Chart 7.6 below).

110 Chapter 7

CHART 7

.6

DIFFERENT SAVINGS AVENUES RATIO TO HOUSEHOLD DISPOSABLE INCOME

o f total Househ old Inc ome

14^—

12

1^ r

2

1 1978 1979 1980 1981 1982 19113 198-1 1985 1986 1987 1988 199 9

Super and Life Bank Deposits

Other Savings "'"— Total Household

Source: ABS data

There has also been a rapid rise in superannuation fund assets from $32 billion

in 1983 to $125 billion in December 1990, but annual acquisition of other assets by households has declined (see Chart 7.7).

Chapter 7

111

CONSTANT 1990 P

RICES

25 --- --

20

15

IM

5

CHART 7.7

HOUSEHOLD FINANCIAL ASSET ACQUISITION-

0 -- ----

1980 1981 1982 1983 1084 1985 1986 1987 1988 1989

" --- I1ANK 3)EPOSITS GOVT SECURITIES

' OU1L1)ING SOCIETIES '-'"' SUPER CONTRIBUTIONS

There has been, however, no demonstrable net impact to date on gross national

saving. Indeed, as public sector savings have fallen and private sector savings have stagnated, national savings have slumped.

The Hawke Government's current strategy is to claim that Australia's national savings problem will be resolved by the introduction of a compulsory "guarantee" levy on employers to force them to make superannuation contributions on behalf of their employees. Lacking any clear policy direction and being unable to

encourage people to enter superannuation voluntarily, Labor is now trying to force the employers of average working Australians to provide superannuation by way of a taxation levy under their inadequate, inequitable and inefficient retirement income policy.

The proposed compulsory superannuation levy, to be introduced in July 1992, will have disastrous economic consequences for the nation. Not only will it cause the loss of up to 70,000 jobs but it will also mean that retirement planning is well and truly taken out of the hands of the individual and placed firmly in the hands of union bosses, employers and a few superannuation fund managers.

The most likely effect of the Government's proposals will be to substitute increased savings in the form of superannuation for reduced savings elsewhere by the household sector, by the public sector and by the corporate sector.

112 Chapter 7

The proposed arrangements will add considerably to labour on-costs for many

businesses, particularly small businesses. Studies by Westpac Bank show that the effective cost of employing a worker on a wage of $500 per week, adding on-costs such as sick leave, long service leave, payroll tax, workers' compensation, and superannuation, is around $700 a week: that is, an on-cost of about 40 per

cent of the direct wage cost.

There are three possible consequences of this situation. To the extent that employers are prepared to absorb superannuation "on costs" into their profits, corporate savings may fall fully or partly, thus offsetting any rise in personal savings. To the extent that employers pass on the "on-cost" in the form of higher

prices, it may erode at least a portion of the real private sector savings which might otherwise occur. And to the extent that employers paying the "on cost" are forced to reduce output and investment and lay off employees, national incomes and savings will be reduced.

Simulations, using the Treasury-developed Access Economics Murphy model. suggest that the Government's compulsory superannuation timetable will increase both unemployment and inflation. Depending on the precise assumptions used, unemployment could rise by between 45,000 and 70,000, while inflation may rise by over 2 per cent.

The net impact on national savings is unclear, particularly since households may offset all or part of the compulsory savings made on their behalf.

For example, in cases where the employee makes no personal contribution and does not regard the superannuation contributions made as a substitute for wage rises, it seems likely that "award" superannuation will provide a false sense of security which may induce the employees concerned to save less in other traditional forms and, perhaps, to borrow more.

Moreover, the failure to close off the potential for "double-dipping" into the social welfare system opens the way for dissaving in other forms. For example, under present arrangements, people with superannuation can retire early and take their superannuation in a lump sum form which is taxed at a concessional rate. Yet

they may qualify subsequently for a full or part-pension. Unless decisive action is taken to stop this "double-dipping", it is possible that people "forced to save" under the Government's current policy may simply "undo" those savings by such mechanisms.

A further major problem with the Hawke Government's superannuation policy is its threatened concentration of financial power in the hands of a few funds.

The stock of superannuation assets in the year 2000 has been estimated to rise to between $450 to $600 billion in dollars of the day.

Chapter 7 1 13

And within the superannuation industry itself, there is likely to be substantial

substitution between funds, with industry funds likely to grow by 27.5 per cent per annum in real terms over the decade, whereas company superannuation will shrink in terms of membership. It is estimated that superannuation funds by the year 2000 will have $450-600 billion in assets.

This will have major implications for the management and control of investment funds,

The size of superannuation funds will make it attractive for various public interest groups, including political parties and trade unions, to consider ways in which superannuation assets could be used to further their own objectives rather than maximising returns for investors. For example, union leaders have long claimed

that they need superannuation as the "financial firepower" to back up their industrial muscle and are now drawing up a blacklist of companies or industries that they believe are unsuitable investments for industry-based super funds. In a similar vein, the ex-Treasurer threatened the industry that if it didn't maintain

an "appropriate distribution" of investments, he would change the tax treatment of the superannuation industry.

The concentration of economic power will also have important implications for the ownership and control of Australian companies and the direction of national saving into particular investment avenues.

The Hawke Government's proposed superannuation scheme threatens to undermine the competitive neutrality of the financial system as superannuation diverts the flow of funds away from traditional lenders, including the banks and other traditional saving institutions, This development threatens the cost and adequacy of the flow of savings to businesses, particularly small businesses, and to individuals whom the traditional saving institutions are better placed to serve.

Superannuation should not be the milch cow which governments can tap whenever they need revenue for what they consider to be socially desirable expenditures or for capital infrastructure projects that they favour. The primary purpose of superannuation should be to provide a means whereby all Australians are given both the opportunity and incentive to save for their retirement,

7.4 THE LIBERALTNATIONAL ALTERNATIVE

7.4.1 A Comprehensive National Savings Strategy

It is essential that Australia develop a comprehensive national savings strategy that is seen to be fair to all Australians. Such a strategy must embrace both public and private sector savings.

114 Chapter 7

Within the public sector, the Commonwealth, State and Territory Governments

need to move to re-establish progressively the longer term viability of their Budget positions. Over time, it is desirable that the public sector move towards a position of near financial balance in which all of its own investment needs are covered by savings within the public sector itself.

The Coalition's program will involve a substantial Commonwealth contribution towards public sector savings in its critical phase. In 1993/94 the net surplus arising out of the Coalition's measures is $4.26 billion.

Over the longer term, it is essential that all future tax and expenditure measures should be fully funded - a condition again fully satisfied by the package of measures contained in this document.

As the structural reforms outlined in this document take effect, further gains in public savings should be possible as revenues increase and the need for social welfare payments to the unemployed diminishes.

Rebuilding private sector savings also remains the major challenge to policymakers.

Labor's income tax system benefits particular forms of saving, such as superannuation, and it is generally higher income earners who are able to take most advantage of them.

Compared with these forms of savings, the present tax system provides a significant bias against interest earnings on financial assets which are effectively taxed twice under the personal income tax system and are subject to the ravages of inflation.

What is needed is a broad-based approach to tax concessions which provides a more equitable treatment between different forms of saving, different savings institutions and, most importantly, different savers.

Accordingly, the Liberal and National Parties have decided to introduce a range of tax concessions to foster private sector savings which:

• are targeted to those who may change their saving behaviour and attitudes to the benefit of themselves and the wider community;

are cost-effective relative to other forms of assistance, including the age pension;

are directed at improving the fairness of the system by targeting public assistance to those most in need; and

avoid the need for compulsion.

Chapter 7 115

The key elements of our private sector strategy are:

• we will continue to provide preferred tax treatment to the family home - in other words, we will not tax the family home;

• we will change the present superannuation arrangements to provide a fairer, non-compulsory system directed at providing genuine incentives for middle Australia to save more for their retirement;

• we will introduce a new system of Retirement Savings Accounts (RSAs) to diversify the range of financial institutions which can provide savings and superannuation accounts. RSA's have the added advantage of giving access to superannuation for casual and part time workers including women;

• we will initiate a new Tax Free Savings scheme to encourage families and individuals to save.

As part of this savings strategy, we will introduce changes which allow banks and other financial institutions to participate fully in providing superannuation and savings accounts for the public.

Our savings strategy recognises the varying liquidity of the different forms of saving. Thus, the benefits provided to superannuation and long-term retirement accounts exceeds that provided to short-term savings.

In each case, the initiatives recognise the need to provide new mechanisms to encourage savings for spouses so that the benefits of saving efforts by households can be more broadly shared by the family unit.

There are two key elements to our savings strategy:

first, the new superannuation arrangements; and

second, the Tax Free Savings scheme for shorter term savings.

7.4.2 A New Fairer, Non-compulsory Superannuation Scheme.

Australia's population is ageing and the Liberal and National Parties will ensure that adequate incentives are in place to encourage people to provide for their retirement years.

The problem will build over the next two decades and accelerate after 2010.

116 Chapter 7

PERSONS 65+ AS % OF PERSONS 16-64 YRS

35

30

25

20

CHART 7.8

AGED DEPENDENCY RATIO

15 1987 1991 1996 2001 2006 2011 2016 2021 2026 2031

ABS POI'UL<^TIO\ PROJECTIONS series C

The Labor Government has seen superannuation predominantly as either an

increasingly important revenue milch cow or as an increasingly important element of their wage and industrial relations accord. They have not really been driven by the correct motivation for an effective retirement incomes policy.

Even though the Labor Government has reduced the tax advantage of superannuation, it's concessional treatment currently totals $3.35 billion, which has been heavily concentrated and predominantly to the benefit of the wealthy.

Our alternative superannuation policy will, in effect, distribute these tax concessions more equitably and fairly to all Australian individuals and families.

A Coa lition Gove rn ment will significantly reshape the current superannuation system. Instead of a compulsory lowest common denominator employer-funded approach, we will provide all Australians with a fairer, much more generous incentive driven system based on freedom of choice.

In contrast to Labor, we will:

provide a 25 per cent rebate to all individuals on the first $6,000 of contributions per annum whether paid by an employer or member;

in the case of employer contributions, these will be taxed in the h ands of the fund at the individual's marginal tax rate less the 25 per cent rebate;

Chapter 7 117

These measures, in effect, replace the inequitable 15 per cent contributions

tax which under Labor has seen high income earners receive substantial tax concessions while low income earners have received little or no benefit;

retain the level of employer contributions already in place at the time of the next election but make no further compulsory increases. Further increases will be on the basis of choice and incentive rather than on Labor's compulsion;

allow those over age 45, who have made minimal superannuation contributions in the previous five years, to "catch up" by contributing a maximum of $30,000 in one year and claiming a maximum rebate of $7,500. This will provide a further incentive for those Australians who, up till now,

have chosen not to enter into long term retirement planning;

abolish tax on lump sums which will be a significant incentive for all Australians to take up superannuation and reap the full financial rewards in retirement;

cap the amount which can be taken in lump sum form at $300,000 (about 10 times AWE but index that cap so that it grows in line with future earnings). This will ensure that high income earners do not have access to massive lump sums at concessional tax rates, and will also encourage the taking of

annuities as a stream of income in retirement;

investigate making a 'clear break' with past tax rules by extending the abolition of the lump sum tax to all accrued lump sum benefits, irrespective of whether pre or post 1983 entitlements. Appropriate transitional arrangements would need to be settled with the industry for those who would want to take a lump sum of more than $300,000;

increase the tax on superannuation fund income from 15 per cent to 25 per cent while still maintaining the current dividend imputation credit system;

maintain the tax free status of the investment income generated by funds paying annuities;

The cap on tax concessions on contributions removes the need for the complex and excessively generous Reasonable Benefits Limits(RBL's) regime which will, therefore, be abolished. This will go a long way towards returning simplicity to retirement planning.

introduce a new system of Retirement Savings Accounts in financial institutions thereby extending the range of savings options for retirement planning;

118 Chapter 7

•

permit individuals to make tax rebatable contributions in respect of their non-working spouses. This recognises the real but unmeasured contribution of the non-working spouse and removes the artificial constraints imposed by Labor's narrow occupational superannuation system;

• allow young Australians to use their superannuation to borrow funds to buy a home. This will be a great incentive for young Australians to take out superannuation in the knowledge that it may be available for home purchase;

• permit a range of more flexible annuities whilst, at the same time, ensuring minimum criteria are met for complying annuities;

• provide freedom of choice to individuals to nominate the superannuation fund to which their contributions are paid, restoring choice instead of compulsion;

• encourage employers and employees to negotiate voluntary employment agreements including the payment of appropriate superannuation contributions beyond the minimum level;

crack down on "double-dipping" by restricting access to the age pension for those in receipt of lump sums. This much-needed targeting measure will introduce better integration between the social security and tax systems;

raise the preservation age to 60;

require all superannuation contributions from employers to be immediately vested;

over the longer term, move to require Commonwealth government unfunded superannuation schemes to convert to a fully funded basis;

consult regularly with the industry to ensure the effective implementation of our policies. We will not adopt Labor's abysmal practice of legislation by press release which has caused so much confusion and misunderstanding, for fund managers, superannuants and retirees alike.

Further details on these changes are provided in the Policy Paper on Superannuation in Supplementary Paper No. 2.

Our reforms will considerably improve the equity and attractiveness of superannuation to middle and lower income groups - the very people who must change attitudes to savings if our savings performance is to improve.

Table 7.9 compares how individuals at various income levels would fair under the Hawke Government's superannuation scheme and the proposed Coalition scheme.

In each case the individual is assumed to be a member of an employer sponsored scheme where the employer is contributing eight per cent of salary and the employee is contributing four per cent of salary.

Chapter 7 119

TABLE 7.9

COMPARISON OF GOVERNMENT AND COALITION PROPOSALS

Labor Government Coalition Proposals

income Level Employee Cont. (a)

4%

Employer Cont. (a) 8%

Rebate (b) $

Tax (c) $

Net Result $

Rebate (b) $

Tax (c) $

Net Result $

Overall Gain $

10000 $400 $800 100 96 +4 100 nil +100 96

20000 $800 $1600 200 192 +8 200 nil +200 192

30000 $1200 $2400 nil 288 -288 300 120 +180 468

40000 $1ii00 $3200 nil 384 -384 400 160 +240 624

50000 $2000 $4000 nil 480 -480 500 200 +300 780

100000 $8000 nil 960 -960 nil 1780 -1780

loss

-820 loss

a) Assumes employer contributes 8 per cent and employee 4 per cent, except in the case of $100,000 it is assumed that employer contributes 8 per cent and employee contribution is nil.

b) Under Labor, a 25 per cent rebate is available on employee contributions if employer contributions are less than $1600 per annum. Under the Coalition, the 25 per cent rebate will apply to all employee contributions of up to a cap of $6,000 per annum on total contributions.

ci Under Labor a 15 per cent contributions tax applies which can be reduced by deductions for death and disability cover and administrative expenses - three per cent in this example. Under the Coalition, the employer's contributions will be taxed in the hands of the fund at the employee's marginal rate less the 25 per cent rebate applying to all contributions up to the $6000 cap.

Table 7.10 shows the net lump sum benefit available after 30 years after allowing for all taxes on contributions, investment income and lump sum benefits.

120 Chapter 7

TABLE 7.10

LUMP SUM BENEFITS

Income Level

Current Labor Arrangements

Coalition Proposal

10,000 174,846 175,828

20,000 333,068 351,656

30,000 434,876 491,722

40,000 570,881 655,629

50,000 708,886 798,620

100,000 1,386,913 1,295,539

Further details of the superannuation reforms of the Liberal and National Parties are set out in the Retirement Income Policy Paper in the Supplementary Papers.

7.4.3 Retirement Savings Accounts

The superannuation taxation concessions outlined above will be available to all persons who establish a Retirement Savings Account (RSA) which is vested and preserved for retirement purposes. We will introduce a new system of RSAs which can be provided by financial institutions.

Arrangements will be made, including any necessary changes to present prudential requirements, to ensure that RSAs can be managed by a wide range of financial institutions, including banks and building societies.

These RSAs will also be made available to part-time, temporary and casual employees, as well as to those outside the workforce including dependent spouses, who will be able to contribute to superannuation funds or RSAs subject to the same rules. They will also be able to transfer any entitlements accrued in RSAs.

Our objective is twofold - to expand the range of choice available to individuals and to allow banks and other financial institutions to compete with superannuation funds in the provision of superannuation schemes.

Further details on the operation of the new long-term savings accounts will be made when we are in government after consultation with the relevant institutions.

Chapter 7 121

7.4.4 Tax Free Savings (TFS)

In addition to the new superannuation arrangements, the Liberal and National Parties will establish a new ' Tax Free Savings scheme (TFS) to encourage Australians who save with financial institutions.

(a) The Objectives of the TFS

The TFS will have two main objectives.

First, it is designed to promote national savings.

Second, it is designed to encourage greater self-reliance by broadening the range of savings options available to Australians, particularly those on lower incomes, who are unable to take full advantage of other savings mechanisms. The scheme will aim to influence the saving attitudes of average Australians. They will be

encouraged to reduce reliance on debt and to save for their own housing, education, health and other needs.

(b) Main Features of TFS

Interest income on all new savings, up to a limit of $1000 per annum for unmarried taxpayers and $2,000 per annum for married couples, will attract a rebate of 30 cents in the dollar.

This means for those with taxable incomes up to $50,000 per annum, facing a marginal income tax rate of 30 cents or less under the Coalition's new tax arrangements, that interest income on new savings up to these limits will be completely tax free.

For those on incomes above $50,000 per annum, income on new savings will attract a rebate of 30 cents in the dollar.

Those enjoying the benefits of negative gearing will be excluded.

(c) The Operation of the TFS

Tax rebates under TFS will be paid to taxpayers who can demonstrate that they have made net new savings after 1 July 1993 in financial instruments such as bank, building society and credit union accounts.

Where new net savings are made after 1 July 1993, the TFS rebate will be available each year on the interest income from those savings. The rebate will be 30 cents in the dollar for the first $1,000 in interest earnings on new savings by unmarried taxpayers and the first $2,000 in interest earnings on new savings

by married couples, regardless of whether the spouse is working.

122 Chapter 7

The effect of TFS, therefore, is that for taxpayers on incomes up to $50,000, with

a marginal tax rate of 30 per cent or less, interest income up to the relevant cap is tax free.

The TFS covers interest income from banks, building societies and other financial institutions, eg cash management trusts. It is the Coalition's intention to seek discussions with financial institutions and other interested groups with regard to the mechanisms needed to implement the proposal and any necessary anti-

avoidance measures. Also, the Coalition is favourably disposed to the inclusion of dividend income in TFS and has costed it accordingly. Before including dividends, however, we wish to consult further on the implications of its inclusion.

Each taxpayer's eligibility is determined by the amount of interest income declared in his or her tax return. TFS, therefore, imposes no new information requirements on taxpayers.

The TFS scheme will operate in the following way:

a base year interest income will be determined for each taxpayer on the basis of declared interest in the year(s) prior to the introduction of the scheme;

increases in interest income of up to $1,000 for single taxpayers and $2,000 for married taxpayers above the base year, after adjusting for changes in the general level of interest rates, attract a rebate of 30%;

the Tax Commissioner, on the advice of the Reserve Bank, would determine an index of retail interest rates to be used to adjust interest income earned in years after the base year for the effect of changes in the overall level of interest rates. The purpose of the adjustments is to ensure that taxpayers

are neither penalised nor given windfall benefits as a result of large fluctuations in interest rates after TFS comes into operation. If, however, a taxpayer wishes to self-assess, and otherwise prove they may have made new savings, that option will be open to them; and

taxpayers who negatively gear and earn negative net property interest income will be deemed for TFS purposes to have no eligible TFS interest income. Only positive net interest income will be counted for TFS purposes. Similarly mortgage interest offset schemes will not be eligible for benefits

under the TFS scheme.

For example, consider a taxpayer who has base year interest income of $1,000 and in the first year of operation of TFS income rises to $2,000. Assuming interest rates had remained unchanged, the $1000 increase in interest income would attract a rebate at 30 cents in the dollar, that is, a rebate of $300 would be

paid.

Chapter 7 123

If, however, interest rates increased during the first year of operation of TFS, the

$2,000 of interest income would be adjusted downwards by the index of the overall interest rate level. Conversely, if interest rates fell in the first year of operation of TFS, the adjustment processes would increase the $2,000 interest income.

In this way, the indexation process ensures that taxpayers only receive a rebate if they have actually increased their savings effort above the base year level of savings.

The following Table shows how the indexation processes would offset changes in the overall level of interest rates in years after the commencement of TFS for a married taxpayer.

TABLE 7.11

Base Year

Year 1

Year 2

Year 3

Year 4

(1) Interest income ($) 1000 2000 3000 4500 2250

(2) Average interest rates (%) 10 10 15 15 7.5

(3) Interest rate index .1 .1 1.5 1.5 0.75

(4) Adjusted interest income ($) ( =(1)/(3)) 1000 2000 2000 3000 3000

(5) Increase in interest income over base year interest income ($)

1000 1000 2000 2000

(6) Rebate ($) (_ (5) x 0.3) 300 300 600 600

If, in Year 2, interest rates jumped from 10 per cent to 15 per cent - an increase

of 50 per cent - and interest income also increased by 50 per cent from $2,000 to $3,000, then the increase in interest income would not reflect increased saving effort. The indexation process would ensure that indexed interest income remained at $2,000 and the rebate in Year 2 would be $300, the same as in Year

1.

In Year 3 it is assumed that the taxpayer has increased savings income of $1,500. Because this reflects increased savings effort rather than higher interest rates, the amount of the TFS rebate also increased.

In Year 4 interest rates are assumed to drop by half to 7.5%. On unchanged savings, interest income also drops by half - to $2,250. However, this reduction does not reflect reduced savings effort. After adjustment by the index, adjusted interest income is unchanged. The taxpayer would again receive a rebate of $600

-the desired outcome in the circumstances of a fall in interest rates.

124 Chapter 7

Under the Coalition's new personal income tax scales, taxpayers earning less than

a taxable income of $50,000 will face 30 cents in the dollar top marginal personal income tax rate. Therefore, the 30 cents TFS rebate on the interest earned on the new savings up to the relevant cap will represent a complete removal of the taxation liability on those earnings -ie, they become tax-free savings.

If, however, the taxpayer earns more than $50,000, he or she faces a higher marginal tax rate - eg, say 36 per cent after the full implementation of the Coalition's income tax cuts - and so the 30 cents rebate on interest earnings from new savings will see the tax paid on those savings reduced from 36 cents in the

dollar to just six cents. In this way, the TFS is biased toward low income earners who receive a much larger proportionate cut in tax on interest earnings than do high income earners.

Table 7.12 shows an example of the size of rebates available to married taxpayers. The table is based on an assumed interest rate of eight per cent.

TABLE 7.12 REBATES ON NEW SAVINGS

New Savings $ per annum

Interest Received

Rebate Available

1,000 80 24

2,000 160 48

3,000 240 72

4,000 320 96

5,000 400 120

6,000 480 144

7,000 540 162

8,000 620 186

9,000 700 210

25,000 2,000 600

Eligibility for TFS will be restricted to resident Australian taxpayers who have supplied the Australian Taxation Office with tax file number details.

Chapter 7 1 25

(d) The Benefits of the Tax Free Savings Scheme

The rebate system will provide a fair and equitable alternative to other forms of savings. The rebate levels will mean that at current interest rates over four million married couple households with children, who have taxable incomes of $50,000 or less, will pay no tax at all on the interest income from the first $25,000

of net new savings. A further one million single taxpayers, earning $50,000 or less, need pay no tax on the interest income from the first $12,500 of new savings.

To be clear, everyone with new saving gets the 30 per cent rebate but those with incomes above $50,000 will start to be taxed on additional savings at a rate equal to the difference between their marginal tax rate and the 30 per cent rate.

(e) Cost of the Tax Free Savings Scheme

TFS will be introduced as from 1 July 1993 but will not begin to impact on revenues until 1994/95. The estimated cost of TFS in 1994/95 is $500 million rising by $20 million per annum to $600 million by 1999/2000.

(f) The Tax Free Savings Scheme and National Savings

The TFS will not lead to substitution of private sector saving for public sector saving because the TFS has been fully funded from budget cuts designed to cap the benefit available. The cost of that capped benefit is provided for in the funding of our tax and expenditure reforms.

If the TFS were to lead to a larger private saving response than anticipated, it would add to the estimated cost of the scheme and hence reduce public sector savings. However, because the tax rate applying to the incomes from which TFS savings are made will be well below 100 per cent, any net increase in private sector savings will be larger than the tax revenue foregone as a result of the

application of TFS.

The TFS is designed to attract net new savings from those on lower incomes who find it difficult to utilise other saving forms and who are currently severely disadvantaged by taxation of their interest income.

The TFS will make a positive contribution to national savings while, at the same ti me, adding to the equity and fairness of the tax system.

126 Chapter 7

II.

I^Wr M.1^ frl - ..

8. A CO-ORDINATED ANTI-INFLATION STRATEGY

BUILT ON SOUND MONEY

8.1 D-rMODUCTION

Inflation is a serious and chronic economic problem for Australia. By the end of this term of government, the value of money will have been halved due to in fl ation since the Hawke Labor Gove rn ment came to power.

As Mr Bernie Fraser, Governor of the Reserve Bank, has noted, the average rate of inflation in Australia was 9.4 per cent during the 1970's and 8.7 per cent in the 1980's.

Recent reductions in the rate of inflation are directly the result of the impact on prices of the severest recession in 60 years. Every major economic analyst in the country, including the Commonwealth Treasury, has forecast inflation to rise in future years.

Unfortunately, Labor simply has not put in place a strategy to deliver a sustainable improvement in Australia's chronic inflation problem.

The program of national re-building outlined in this document will be implemented within a medium-term framework designed to achieve and maintain price stability.

That objective is an essential basis for restoring competitiveness and encouraging savings.

To meet that challenge the next Coalition gove rn ment will:

commit overall economic policy and monetary policy, in particular, to the medium-term goal of price stability;

back that commitment by implementing the major structural reform program outlined in this document;

put in place the competitive environment and labour market arrangements which allow the bene fi ts of structural reform to flow through into reduced cost structures in Australia; and

in relation to the one-off CPI impact of the GST:

- more th an adequately compensate low and middle income earners;

Chapter 8 127

bolster the Prices Surveillance Authority to monitor the one-off price

impact;

make explicit provision to avoid double taxation during the transition from the sales tax regime to the GST by way of a sales tax credit.

8.2 INFLATION AS A PROBLEM

The adverse effects of inflation have been entrenched by indexation and continual nominal wage increases. The fact is, however, that these measures only create a perception that we are keeping up with inflation. They do not in fact stop the erosion in the value of our money.

Most importantly for the future of our country, inflation distorts investment decisions by business. It encourages the pursuit of short term nominal gains caused by inflation as opposed to longer term investments which will produce real increases in wealth. This is particularly apparent when one compares the

possibility of quick gains through property investments (backed up by negative gearing) and the long gestation period involved in setting up a mining or manufacturing business.

As a result of such distortions, our export competitiveness falls and the stream of future income for the country will decline.

High inflation also changes household expenditure decisions. Household behaviour tends toward a "spend now" mentality so as to forestall the reduction in the purchasing power of future household income. The result of this is to encourage spending at the expense of saving. That is the exact opposite to the national priority of increasing domestic saving to help slow the growth of foreign debt (ie. the borrowing of foreign savings).

Inflation robs pensioners of their savings. Of all income groups, those on fixed incomes are the hardest hit by inflation. If not adequately compensated, as the Coalition proposes with our taxation reforms, they cannot make up the loss in purchasing power that occurs year after year. In effect, there is an arbitrary

transfer of wealth in the community and it is usually away from those who can least afford it.

Finally, inflation causes taxation through stealth and gives the Government a vested interest in its continuation. Inflation is constantly penalising the personal income taxpayer through "bracket creep", whereby inflation and the associated nominal wages increase designed to keep up with it, moves taxpayers into higher

and higher personal income tax brackets. They pay more tax even though their real income (the actual purchasing power of their take home pay) is static or, in many cases, falling because of inflation. Access Economics has calculated that between 1983/84 and 1990/91 the Government has ripped an additional $22

billion (in cumulative terms) from taxpayers through the effects of bracket creep.

128 Chapter 8

There is no

doubt that inflation is theft. It creates uncertainty and attacks stability. It encourages the "boom and bust" cycles of the Australian economy. It results in a fall in competitiveness and savings and therefore exacerbates Australia's enormous foreign debt problems.

8.3 ATTACKING INFLATION

The Coalition's tax, tariff, and industrial relations and infrastructure policies are a co-ordinated approach to Australia's economic problems of foreign debt and inflation.

There are six key elements of Coalition policy which together will effectively fight inflation.

8.3.1 A Commitment to Price Stability

The Coalition has formally committed itself to the medium term objective of price stability, universally conceded to be an inflation rate of 0-2 per cent.

The Coalition's commitment is a reasonable and sensible objective for a government prepared to make the necessary policy changes, but it is an almost impossible task for a government hamstrung by a Prices and Income Accord which continually produces abysmal productivity growth and nominal wages growth far

in excess of that productivity growth. Any recent improvements in the rate of inflation must be seen in context of the worst recession in 60 years. The real test is what will happen to the inflation rate if the economy begins to move out of recession and domestic demand rises along with the pressure on prices. Unless

there have been fundamental, structural changes to the economy, as explained in this paper, any quick resurgence in demand could quite easily spark an exchange rate collapse that would soon see the re-emergence of chronic inflation. The experience of 1985/86 ought to live long in the memory of all Australians!

8.3.2 Reserve Bank Independence

The Coalition will ensure the independence of the Reserve Bank including by way of amendments to the Reserve Bank Act.

The Reserve Bank-Hawke Government link has been a sorry saga of compromise and influence. Interest rates have been manipulated for short-term political ends (eg, prior to the 1984 Federal election, prior to the 1987 Federal election, prior to the 1988 New South Wales election and prior to the 1990 Federal election). The Reserve Bank has also been party to deals with the major banks on housing interest rates when the Government's policies had failed to hold them down. The

former Treasurer has boasted that he had the Reserve Bank in his pocket and that it did what he told it to do!

129

Chapter 8

Moreover, financial markets have often been confused about the monetary policy

intentions of the authorities and the Reserve Bank has not been sufficiently publicly accountable for its actions.

To put this era behind us, the Reserve Bank must now be formally guaranteed its independence within the context of the Government's overall economic management. Its role and responsibilities need to be clearly spelt out. This is not to say that the Reserve Bank will be solely responsible for inflation control, or that

it will be left on its own to do what it can to control inflationary forces, as it has since the Hawke Government has failed to put other necessary policies in place.

Clearly, the Reserve Bank should not be left such a role by default. But it does have an important role to play in the conduct of monetary policy. Its role needs to be clearly specified and the Reserve Bank needs to be held publicly accountable for it. The aim should be to achieve a greater visibility in the setting of monetary

policy so that those making the key saving and investment decisions in our economy can plan ahead with better knowledge and greater certainty. For that purpose, we plan to have the Governor testify regularly before a Parliamentary Committee and encourage greater public discussion of the inter-relationship between monetary policy and other arms of policy.

Excessive reliance on monetary policy and interest rates of the kind we have seen in recent years can be avoided only if the Government does its part to change other policies to reduce or eliminate cost disadvantages and free up markets. We therefore envisage two-way discipline as a result of the enhanced independence of the Reserve Bank. The Government would clearly specify the role and responsibilities of the Reserve Bank and the Bank would be held publicly accountable for its performance. Equally, the Government would be under

constant pressure to push ahead with labour market and structural reforms.

8.3.3 Fiscal and Monetary Policy

It is essential, if chronic inflationary expectations are to be squeezed out of the system, for fiscal and monetary policy to be kept firm while the other policy initiatives are undertaken.

That does not mean to say that monetary policy should be kept so restrictive as to cause the disastrous recession-inducing high interest rates to which Labor has resorted. As mentioned above, while that does get inflation down, the pain is unnecessarily severe and it is not sustainable. As soon as interest rates are eased and the economy begins recovering from recession the chronic inflation problem returns.

130 Chapter 8

Instead of the above mentioned heavy-handed course, the Coalition believes that

a better mix of macroeconomic policy should be adopted. Fiscal policy will be held relatively more 'tightly' so that monetary policy does not carry the full burden of controlling aggregate demand. In that way a greater share of the burden in moderating the inflationary effects of domestic demand will be borne by the public

sector, and not by the generally more efficient wealth producing private sector.

As part of its anti-inflation strategy the Coalition therefore advocates a 'tighter fiscal policy than the Labor government. In practical terms that requires a smaller government sector and further cuts in government expenditure. That is why the Coalition has nominated substantial expenditure cuts in this blueprint

for reform.

Accordingly, as a result of our broad reform agenda, interest rates will always be lower under the Coalition than under the Hawke Government. This will also beneficially impact on the exchange rate and lower it towards its long term competitive level.

8.3.4 Industrial Relations Reforms

The centrepiece of the Coalition's economic policies is industrial relations reform. Enterprise agreements based on productivity will see nominal wages growth in line with productivity rather than pseudo wage indexation under the Labor Government's Accord with the ACTU.

It is a well established fact that nominal wages growth over and above productivity growth simply dissipates into higher inflation. It is worth noting a revealing calculation done by the Confederation of Australian Industry which shows that between 1966-67 and 1989-90 real wages grew by some 45.5 per cent while productivity (roughly measured by GDP per employed person) rose 44.0 per

cent. The two measures grew roughly in line as would be expected. This simply adds more evidence to support the Coalition's policy that industrial relations must be reformed to ensure that wage growth is based on productivity growth. The best way that this can be done is for as many employment contracts as possible to be settled at the enterprise or workplace level.

Workplace productivity-based wages settlements are absolutely fundamental to the sustainable control of inflation, especially as these 'cascade' through so many other essential areas of structural reform.

The Coalition is committed to having no further national wage cases. Furthermore, we will retain any level of employer superannuation contributions which may be in place at the time of the next election but there will be no further compulsory increases. Further increases will be on the basis of policies of choice and incentive, not Labor's compulsion.

Chapter 8 131

8.3.5 Tariff Reform

The Coalition policy of reducing tariffs to negligible levels by the year 2000 will significantly reduce the price level of a whole range of ordinary consumer goods, especially textile, clothing and footwear. It is worth recalling an example given in the Garnaut Report' into Australia's competitiveness in the Asian Region. The Report notes a Social Security television advertisement that told mothers that new

family allowance increases would enable them to get another pair of school shoes for their sons and daughters. As the Report commented, if protection for the Textile, Clothing and Footwear Industries was removed the same amount of family allowance would allow children two pairs of shoes, not just one.

Reducing tariffs will also reduce the cost structure of Australian businesses and thereby enhance their international competitiveness.

The Coalition's tariff policy will assist in fighting inflation by its interaction with our industrial relations policy. With the pulling down of protective barriers employers will have to think twice about caving in to union demands. Conversely unions will have to think twice about proceeding with wage demands which will

throw their members onto the unemployment queue.

The Industry Commission has estimated that the phase out of assistance for the rural and manufacturing sectors would lead to a sustained reduction in the level of consumer prices of close to four per cent over the longer run.

8.3.6 Structural Reform

The Coalition's comprehensive program of structural reform will have a substantial impact on inflation through the efficiency gains it will generate in key infrastructure industries, a portion of which will flow into reductions in the overall cost structure.

Presently Australian industry faces cost disadvantages of 20-50 per cent in such areas as transport, waterfront, electricity generation, etc.

By way of example, the Industry Commission has estimated that the structural adjustment package covering the measures outlined in this Report would lead to a sustained reduction in the level of consumer prices of about 2.5 per cent over the longer run.

8.3.7 Taxation Reform

Notwithstanding the one-off effect of the goods and services tax on inflation discussed below, the reform package will have a major and ongoing impact on the cost structure of business.

132 Chapter 8

No longer will workers be subject to a "taxation by stealth" through such avenues

as personal income tax "bracket creep" and automatic indexation of excise.

The Coalition makes the commitment that in government we will automatically calculate and return to taxpayers the proceeds of "bracket creep" and this commitment is achieved in the package outlined.

We will also abolish the automatic indexation of excise.

These are significant fiscal disciplines to impose on a government and provide an automatic check on the growth of government expenditures. In addition, they strengthen a government's resolve to fight inflation, for while inflation will continue to put strains on its expenditure side, the Government will no longer have the luxury of automatically increasing tax revenues.

The Coalition will abolish the automatic indexation of alcohol and tobacco excises. The tax rates to apply to these items will be announced in the Budget each year.

8.4 GOODS AND SERVICES TAX AND i FLATION

The prospective low inflation environment of the early 1990s offers Australia the best opportunity in over two decades to successfully introduce a Goods and Services Tax without an attendant risk of sparking an inflation spiral.

While most forecasters expect inflation to pick up again from current levels. surveys suggest that inflationary expectations have broken down towards sustainable levels, well below those experienced in the 1980s.

The strong anti-inflationary stance of the Coalition's policies outlined in this document will reinforce that revised level of expectations and it can be expected that businesses, wage earners and other groups in society will rightly see the "one-off' impact of the Goods and Services Tax as a temporary occurence along a path towards the achievement of price stability as we move into the second half of the decade. Their price and wage demands will be formed against that medium term perspective rather than the temporary occurence which, in any case, will be offset by the abolition of a number of other indirect taxes, namely, sales tax, payroll tax, petrol excise, the training guarantee levy and the phase down of customs duties, and by the fact that they will be more than fully compensated for the net price effect of the introduction of the Goods and Services Tax.

The cumulative effect of the Coalition's tax reform package is set out in Table 8.1.

Chapter 8 133

15.0

15.0

-3.9 11.1

-4.3 6.8

-0.9 5.9

-1.3 4.6

+0.1 4.7

-0.3 4.4

TABLE 8.1

CUMULATNE PRICE EFFECT OF TAX REFORM

One Off Impact on CPI

Individual. Cumulative measure total

(%) (%)

15% GST on Private Final Consumption Expenditure "

less impact of adjustments made to derive GST base

less impact of WST abolition

less impact of payroll tax abolition

less impact of petrol excise abolition

plus net impact of faster phase-out of Customs Duty and increases in Tobacco Excise

Net impact of Indirect Tax Reform excluding Tobacco Excise Increases`°'

(a) See Chapter 5 for for explanation of coverage of private final consumption. (b) See Table 5.3 for derivation of GST tax base. (c) These estimates are based on the CPI basket of goods and services reweighted to exclude tobacco consumption.

While the introduction of a Goods and Services Tax will cause a one-off increase in the general price level, this will be substantially offset by the reduction in the price level caused by the abolition of these other indirect taxes. As a result, the tax reform package is conservatively estimated to cause a one-off increase in the

general price level, as measured by the Consumer Price Index (CPI), of only 4.4 per cent. (That compares to the estimated 6.5 per cent of the Government's proposed broad-based consumption tax in 1985.)

We say "conservatively estimated" because we consider that we have conservatively estimated the positive price reducing impact of the abolition of petrol excise and the wholesale sales tax.

134 Chapter 8

For example, the burden of petrol excise is borne in the price of virtually every

good and service produced in Australia. This is because virtually all production processes, at some stage, involve transport haulage which attracts the high penalty rates of petrol excise.

In addition, it can be argued that the most accurate measure of the general price level movements may not be the CPI at all. Prime Minister Hawke and former Treasurer Keating have often quoted in Parliament the non-farm GDP deflator figures, which they regard as a more broadly based and authoritative measure of

inflation.

Indeed the Australian Bureau of Statistics notes that deflators:

"...relate to a broader range of goods and services in the economy than that represented by any of the individual retail and wholesale price indexes leg the CPI] published by the ABS'fz

The one-off increase in the non-farm GDP deflator caused by the implementation of our taxation package is estimated to be 2.2 per cent. If this is indeed the most reliable, broad-based measure of inflation in the Australian economy, all of the Coalition's proposed social security compensation packages should be keyed off this number.

However, again to err on the side of caution, as noted elsewhere, we have decided to compensate all Australians based on the CPI and, indeed, on rates ranging from 4.8 to 8 per cent - not the 4.4 per cent actually estimated to be the one-off impact of the indirect tax reform package. This results in a social security compensation

package of around $2.5 billion. In passing we note that if we had used the non-farm GDP deflator the compensation package would have been at least a massive $1 billion less than we have catered for.

But why won't the general price effect of the tax changes cause on-going inflation?

The rise in the general level of prices in the Australian economy caused by the indirect taxation reform package of the Coalition will be compensated for by both a generous social security compensation package (indeed overcompensation) and a massive cut in the level of personal income tax. As a result, there will be absolutely no necessity for wage increases to incorporate this general price rise. This is because Australians' disposable income will rise sufficiently, through the

pension increases and tax cuts, to dispense with the need for unions, or employees generally, to seek a wage rise because of the CPI effect.

Therefore, the CPI effect will not be incorporated into wage levels, or the cost levels of business, and as a final result the price level increase will be a one-off 4.4 per cent, contained to the year of introduction, and not passed through into ongoing inflation.

Chapter 8 135

Indeed, the Hawke Government's 1985 Draft White Paper on Reform of the

Australian Taxation System quotes with authority a study conducted by the Fiscal Affairs Department of the International Monetary Fund. The Hawke Government noted:

"The study covered 31 cases of the introduction of a Value Added Tax (VAT) concluding that only in four of them could the VAT have contributed to an increase in the rate of inflation; in each of those cases the changes were associated with expansionary wage and credit policies. In general, even where there was a lift in the level of the

CPI, there was no continuing effect on the rate of inflation. The study cites the importance in this respect of frank public discussion, provision of information to the public and traders, price monitoring, and offsetting adjustments in other taxes and transfer payments.

It is clear that the circumstances in which Australian reform is being developed would, in comparison with the international experience, maximise the possibilities for confining price effects to an initial change in levels. '3

These conclusions have been confirmed by subsequent IMF research which surveyed the price effects of introducing a GST (or VAT) in 35 countries which stated:

"Perhaps the most important conclusion of the survey is that there is nothing inherently inflationary about the use of the VAT."^

Since 1985, the experience of introducing a Goods and Services Tax in New Zealand (in 1986) and in Canada (in 1991) both confirm that the threat of on-going inflation from tax reform is minimal. New Zealand, in particular, has a proud record on inflation, with the current year's rate of around 2 per cent.

The IMF had this to say about the inflationary effects of the implementation of a GST in New Zealand:

"The authorities went to great lengths, using an extensive advertising campaign to reduce the public's fear about price increases and to contain any possible attempt by traders to take advantage of the uncertainty to widen margins. It was estimated that about half of the 10 per cent VAT yield

would be needed to replace the previous sales tax; this left about a further 5 per cent net increase to be reflected in higher prices. As it turned out, some traders did increase their margins and the actual outturn for the first quarter, after the introduction of VAT, was a price increase attributable to

VAT of 6.5 per cent. The Government confidently expected the rate of inflation to return to the previous trend in successive quarters, as it did, so that the introduction of VAT can be seen, not as'inflationary, but as a once and for all blip.

136 Chapter 8

The Canadians estimated that the price impact of their seven per cent Goods and

Services Tax (which replaced the Federal Sales Tax from 1 January 1991) would be 1.25 per cent in 1991 and it appears that the outcome will be broadly in line with expectations, or better.

Nonetheless, as noted by the IMF above, it is important to ensure that no wage pressures develop and, therefore, the Coalition, when in government, will conduct an extensive public education program to this end.

8.5 PRICES SURVEILLANCE AUTHORITY

The Coalition has reversed its previous policy of abolishing the Prices Surveillance Authority (PSA) during its first term of government. Instead, the PSA will be retained and provided with additional resources during the implementation phase of the indirect taxation reform program and will re-order its priorities to focus its

attention on making sure that businesses pass on the benefits of the tax and other structural reform to their customers.

The enhanced role for the PSA will include:

Informing consumers about how prices of key goods and services will be affected by the GST, so that they can make informed buying decisions. Also, in those areas where the abolition of the sales tax and implementation of Goods and Services Tax should see a fall in prices on certain items, the PSA will be asked to advise the government of any anti-competitive

behaviour;

Using public information programs and subsequent market forces to encourage vendors to pass on savings that result from the elimination of the Federal sales tax and its replacement by the GST;

Looking into consumer complaints related to irregular price changes attributed to the replacement of the wholesale sales tax, the payroll taxes and petrol excises with the GST (The office watches price movements on categories of goods and services and keeps the public informed of its findings).

Monitoring public utilities to prevent the latter abusing existing CPI based pricing mechanisms by factoring in the Goods and Services Tax CPI effect in final prices to consumers.

Chapter 8 1 37

8.6 WST/GST TRANSITION

To counter the possibility of price increases as a result of double taxation during the transition period, the Coalition has provided for a wholesale sales tax refund, to be called a Sales Tax Credit, for stock on hand for a short time after the introduction of the GST. See Chapter 9 for a detailed discussion of the Sales Tax

Credit.

8.7 CONCLUSION

The Coalition is convinced that there does exist in the community a willingness and courage to face up to the policies required to defeat Australia's chronic inflation problem. What is needed is the political leadership to explain the task ahead - the cost and the benefits of fighting inflation. People must be convinced

that the benefits from defeating inflation will far outweigh the costs.

References

1. Ross Garnaut, "Australia and the Northeast Ascendancy', A Report to the Prime Minister and Minister for Foreign Affairs and Trade, October 1989

2. ABS, Australian National Accounts, Concepts, Sources and Methods, May 1990

3. Reform of the Australian Tax System, Draft White Paper, June 1985

4. Alan A Tait, 'Value Added Tax: International Practice and Problems", International Monetary Fund, Washington, 1988

138 Chapter 8

9. TAX ADMINISTRATION

9.1 THE NEED FOR INCOME TAX ADMINISTRATION REFORM

Every Australian taxpayer - from the largest corporation to the average PAYE individual - has experienced difficulty with the complexity of our taxation laws and their administration.

Even as far back as 1985 the Labor Government's Draft White Paper on Tax Reform recognised the high economic cost of Australia's complex tax arrangements:

The complexity of the system is notorious. The costs that this complexity imposes on taxpayers and tax collections alike are vexatious to individuals and a dead weight loss to the economy, "'

Since 1985, an estimated 18,000 extra pages of tax related material (including legislation, tax rulings, explanatory memoranda, second reading speeches, court judgements etc) have been added to the already excessively complex body of tax law. In 1990, in recognition of the growing complexity of Australia's tax law, the

Federal Government appointed a committee to make recommendations to simplify the system. This effort has also failed to produce adequate results.

As a result of the continuing increase in legislative complexity, many valid concerns are now being raised by taxpayers relating to the administration of tax and the operation of the Tax Office itself.

An illustration of the consequent administrative inefficiencies is shown in the Table 9.1 below where the cost of tax revenue collection in Australia runs at $1.09 per $100 collected (1989/90), compared with the US 51 cents per $100 collected (1989). The very wide discrepancy between the two does not appear to be

explicable other than by likely administrative and policy-induced inefficiencies,

Chapter 9 139

TABLE 9.1

COST OF TAX REVENUE COLLECTION PER $100 COLLECTED

Year * US Australia

1985 48 cents $107

1986 49 cents $1.06

1987 49 cents $1.03

1988 54 cents $1.03

1989 51 cents $1.09

* US - calendar years ending December Australia - fiscal years ending the following 30 June

Consequently, an early priority of the Liberal and National Parties in government will be to reform the tax administration system. Our main priorities will be to; -

assess the present cost impact and extent of compliance obligations and implement necessary measures to minimise this burden.

modify the self assessment process;

appoint an internal Tax Office Ombudsman; and

change the way in which the Tax Office is administered by appointing a representative Board of Directors.

Indeed, the abolition of wholesale sales tax will in itself be a major simplification of the system. It will involve repeal of nearly 30 legislative enactments. In addition the abolition of payroll tax, fuel excise, and the training guarantee levy will substantially simplify Australia's tax laws and reduce business compliance

costs.

9.2 COMPLIANCE COSTS

In 1990 the Business Council of Australia and the Tax Research Foundation completed a draft report on the cost to the corporate sector (public companies only) of compliance with income tax laws.

The study defined two components of compliance costs:

computational costs associated with the calculations and related accounting procedures required to determine tax liability, and

140 Chapter 9

planning costs which relate to the prudent management consideration of a

company's present and future tax position.

The draft report concluded that the gross compliance cost in the study period 1986/87 amounted to nearly 24 per cent of revenue collected. By contrast in the same year, the cost to UK companies of compliance was only 2.2 per cent of revenue collected.

Australia can no longer afford such an administratively costly and burdensome taxation system. If Australian companies are to compete internationally they deserve a tax system which more closely resembles that of our trading partners.

Simplification of taxation law and practice will therefore form an important element of the Liberal and National Parties' microeconomic reform agenda.

9.3 SELF-ASSESSMENT

The Labor Government began the move to self-assessment in 1986 when the Tax Office discontinued the routine scrutinising of all taxpayers' tax returns. From 1989-90 full self-assessment has applied to companies and superannuation funds, so that these taxpayers are now required to calculate their own tax liability payable and remit it to the Australian Taxation Office (ATO).

The Liberal and National Parties generally support the direction of these changes. In government, however, we will seek to address many of the existing deficiencies which include:

the complexity of procedures for determining tax liability and record keeping;

the high level of risk for taxpayers in the possible misinterpretation of complex and often ill- defined legislation;

the requirement for larger companies to instigate their own internal tax audits;

the cost of disruption, length and inefficiencies of Tax Office audits on taxpayers' premises.

These demands make it difficult for taxpayers to reduce their compliance costs under the present self-assessment regime. Futhermore, it undermines the perceived gains for both taxpayers and the Australian Taxation Office in moving to full self-assessment - a point highlighted by the comment in a recently leaked

Tax Office memorandum that stated:

"... it is already acknowledged that the administrative savings from the existing self assessment may well have been outweighed by the revenue cost. "z

Chapter 9 141

The Liberal and National Parties will, in government, ensure that the self-

assessment process is supplemented by greater tax simplification, As an adjunct to tax simplification, we will move to plain English drafting of tax laws.

We are determined that if full self-assessment is to be successful in Australia, and thus genuinely reduce compliance costs for taxpayers, tax simplification must be pursued with equal vigour.

Accordingly, while the Liberal and National Parties support the application of full self-assessment to individuals, this move should flow from the process of tax simplification and appropriate mechanisms to protect taxpayers rights.

9.4 TAX FILE NUMBER ARRANGEMENTS

There are many examples of the senseless compliance obligations imposed upon the efficient running of Australian companies.

For example, under existing Tax File Number (TFN) arrangements large companies which make interest and dividend transactions between wholly owned group companies are bound by the associated quotation and reporting requirements.

In government the Liberal and National Parties will not apply the existing TFN requirements to inter company transactions and will require the ATO Board of Directors to examine this and like issues.

9.5 INTERNAL TAX OFFICE OMBUDSMAN

Overseas experience, particularly in the USA, indicates there can be advantages in the appointment of an internal Tax Office Ombudsman as a point of reference for taxpayers on issues of dispute or conflict with the Tax Office. The Liberal and National Parties will, in government, make such an appointment.

9.6 AUSTRALIAN TAX OFFICE BOARD OF DIRECTORS

The Liberal and National Parties are committed to making the Tax Office more accountable for its performance and more responsive to the genuine difficulties faced by taxpayers.

Consistent with this objective, a Board of Directors will be appointed to develop (and subsequently to supervise) a strategy for more effective interaction between the Tax Office and the tax -paying community. Board members will be drawn from business, the accounting profession and a range of other community groups.

It will be headed by the Commissioner of Taxation who will also retain his primary responsibility for the day-to-day administration of the Tax Office as well as his statutory responsibility to the Treasurer for its operations.

142 Chapter 9

The Board will be charged with the specific legislative responsibility to advise the

Government on:

simplification of the tax system; reduction of compliance costs imposed on taxpayers; development of a more efficient, client-responsive Taxation Office.

In short, the Board will have general oversight of the establishment of a world standard tax regime.

While the Board will be appointed by the Treasurer, it will be required to report annually to Parliament on progress in achieving those nominated responsibilities, and to give evidence to a specifically designated Parliamentary Committee.

9.7 TAX ADMINISTRATION AND THE GOODS AND SERVICES TAX

9.7.1 The Cost Of The Wholesale Sales Tax System

Labor's wholesale sales tax imposes a huge administrative cost burden on Australian business. The wholesale sales tax is not a simple, cost effective tax. It is characterised by many exemptions and by differential tax rates and is plagued by problems relating to valuations and classifications.

The Liberal and National Parties have estimated the compliance costs associated with the wholesale sales tax impacts upon business at approximately $400 million annually. This represents only the salary component of staff employed by business to ensure that they fulfill their sales tax obligations. Another estimated

$100 million is expended on the professional fees of lawyers and accountants to assist in the interpretation of the anachronistic wholesale sales tax regime.

In addition to the compliance costs met by business, the Federal Government now employs 763 personnel nationally at the Australian Taxation Office just to administer the wholesale sales tax at a cost of $30 million annually. In a wholesale sales tax regime with only 70,000 taxpayers, this represents a staff to taxpayer ratio of 1:90 - a ratio which is far in excess of international averages.

9.7.2 Goods And Services Tax And Business

In contrast to the wholesale sales tax, the Goods and Services Tax is a straightforward tax for business.

Despite the Goods and Services Tax's inherent simplicity, international experience suggests the most widespread concern for business prior to the introduction of a Goods and Services Tax was its implications for those who were obliged to collect

it. In this regard, the Liberal and National Parties are well aware of the position of business and we will ensure a smooth transition process in the introduction of the Goods and Services Tax.

Chapter 9 143

Although Goods and Services Tax will not necessitate the gathering of more

accounting information than is already collected by most businesses, it is clear that, where businesses do not currently pay wholesale sales tax, the introduction of a Goods and Services Tax will involve some additional compliance responsibilities. However, these new obligations also bring benefits, including:

the requirement for smaller firms to maintain better accounting records, thus providing a more informed basis on which to make management decisions;

an improved cash flow position. In most instances a business will collect Goods and Services Tax on sales in excess of the amount of Goods and Services Tax it pays on purchases. A considered approach to sales/purchase decisions and utilising normal credit periods available to business should benefit the average trading enterprise in any annual period;

the abolition of payroll tax and the training guarantee levy which impose heavy compliance costs on business;

rollover relief from capital gains tax for small businesses and significant cuts in personal income tax.

In focussing on the implications of Goods and Services Tax for business and, in particular for smaller trading enterprises, the administrative impact needs to be kept in perspective. For example, following the introduction of the Goods and Services Tax in New Zealand, farmer associations have estimated that, for a farmer who files every two months, paperwork takes a total of 3.6 hours or as little as 1.5 hours a month.

It has been stated recently by the President of the New Zealand Farmers' Federation that the requirement to account for Goods and Services Tax has made New Zealand farmers better managers and has focussed their attention more fully

on cash management techniques.

While the Goods and Services Tax will not adversely impact on the existing accounting arrangements of most businesses, the Liberal and National Parties will provide for income tax deductibility of additional capital equipment needed to accommodate the Goods and Services Tax. The Goods and Services Tax Planning and Co-ordination Office (its establishment and functions are described below) will

consider this more fully and make recommendations as to the type of equipment the concessions should apply to, and the level to which the concession may be available.

Funding for this initiative will be sourced from the $125 million set aside for Goods and Services Tax administration.

144 Chapter 9

The other major transition issue relates to the treatment of goods previously taxed

under the sales tax regime but sold under the Goods and Services Tax regime, In this respect we have provided $400 million to operate a sales tax credit arrangement during the implementation of the Goods and Services Tax. The detailed operational aspects of the arrangement will be considered by the Goods

and Services Tax Planning and Co-ordination Office. Details of the Office are set out later in this paper.

9.7.3 GST Procedures

To allow business to make an initial assessment of the administrative requirement associated with the Goods and Services Tax, a short description of the Goods and Services Tax return process has been outlined below.

(i) Filing Returns

Depending on the return period, all registered businesses will be required to file periodically a Goods and Services Tax return. The Goods and Services Tax return will simply state in a summarised form the amount of tax collected and the amount of tax paid on these purchases, and the difference between the two. It is

the difference that is either remitted to, or owed by, the Government.

(ii) Tax Invoices

To ensure the integrity of the system, supporting documentation in the form of prescribed tax invoices will need to be maintained by each business. This invoice will need to be produced for the taxable supply of all goods and services.

The provision of invoices with specified Goods and Services Tax information will probably be one of the most significant changes required of a business under the new Goods and Services Tax system, although some businesses - particularly those with international franchises - already have systems in readiness.

Typically, a tax invoice for high value supplies will need to contain the following information:

the words "tax invoice' ;

name and registration number of the supplier;

the name and address of the recipient;

the date upon which the tax invoice is issued;

a description of the goods and services supplied;

the quantity or volume of the goods and services supplied;

Chapter 9 145

TABLE 9.2

Name of Supplier

The words 'TAX INVOICE'

Supplier's GST Registration Number

Tax Invoice

GST No, 99-999-999

Date: 20.9.91

Total Amount Due 54.600.00

Value of goods and services

Total of GST charged

Quantity Description of Goods & Ser vices and unit price Net Cost Total

4 VCR @ $1,000.00

Plus Goods & Ser vices Tax

$.000. 00

S4.000.00

S 600.00

$4.000.00

the total amount of the tax charged, the consideration excluding tax and the

consideration inclusive of tax for that supplier.

Table 9.2 indicates what a typical invoice would probably look like.

ABC Electronics Limited 113-117 Vine Street GPO Box 99 SYDNEY NSW 2000

To: West Video Ltd 10 John Street MELBOURNE VIC 3000

Name and Address of Recipient

Consideration of the goods and services supplied

146 Chapter 9

(iii) Goods and Services Tax and the Banking System

With the co-operation of the banking system, there are a number of approaches which can streamline the transmission of funds in the Goods and Services Tax return process:

Banks can provide a direct credit mechanism for the Taxation Office to transfer funds into the accounts of businesses where net Goods and Services Tax refunds are payable by the Taxation Office; and

Banks can allow business to directly credit a nominated Taxation Office account where Goods and Services Tax is payable to the Taxation Office.

Banks can be of even greater assistance to the business operator in assisting in accounting for Goods and Services Tax.

In New Zealand a co-operative arrangement between the trading banks led to the adoption of the GST Ledger System. In essence, the system analyses all banking items, cheques, deposits, automatic payments, direct credits and bank charges, and sorts these according to the GST category.

At the end of each month or GST return period, a GST ledger report is produced for the bank customer. The report breaks down all transactions under the appropriate heading and provides totals, for the reporting period, within each category:

GST income; GST expenditure; exempt GST; zero-rated items.

An adjustment sheet is provided to allow for manual alterations for unidentified items. The figures produced provide the necessary detail to complete the business's GST return.

A system designed in this manner would relieve businesses of an accounting task and may be particularly attractive to high transaction operations such as retailers. Depending upon the bank, a fee may be charged for this service.

9.7.4 Government Administration Of The GST

(i) Administration Costs

$125 million has been allocated for the administration of the Goods and Services Tax. The Labor Government's 1985 Draft White Paper estimated administration costs at $80 million.

Chapter 9 147

In formulating the package, the Liberal and National Parties will implement

policy measures which help to reduce Goods and Services Tax administration costs. These measures include:

adopting a uniform rate;

minimising the number of exemptions;

providing an exemption below the $30 000 turnover level;

granting firms the opportunity to file returns less frequently, thereby minimising the amount of paperwork flowing through the system; and

utilising as far as possible trained staff transferred from areas where taxes have been replaced.

The adoption and careful management of these and other measures will reduce the costs associated with administering the Goods and Services Tax system and will contrast with the inefficiencies that characterise current wholesale sales tax collections.

(ii) Staffing

Currently in Australia there are in excess of 1000 government employees at both Commonwealth and State levels involved in collecting taxes or excises that will be abolished by the Liberal and National Parties. Table 9.3 identifies the number of staff engaged in the administration of specific taxes.

TABLE 9.3

TAX EMPLOYEES

Sales Tax 763

Petroleum Excise 100

Payroll Tax 200

TOTAL 1063

As far as possible, the staff under Commonwealth employment will be absorbed into Goods and Services Tax administration duties. Any additional staff required for the implementation and administration of the Goods and Services Tax will be funded from the amount of $125 million allocated to Goods and Services Tax

administration.

148 Chapter 9

9.8 GST PLANNING AND CO

. ORDINATION OFFICE

The Liberal and National Parties' package is the most detailed reform proposal for Australia's tax system ever presented involving as it does the abolition of the existing wholesale sales tax and other taxes and their replacement by a broad based goods and services tax.

While the Goods and Services Tax will not commence operation until 1 October 1994, we have released as part of the documentation of our tax reform package, a technical manual on the operation of the Goods and Services Tax.

We also intend in the run up to the next election to move towards finalisation of the administrative and technical details of the new system and in this regard to consult widely with the business community to ensure that the system is kept as simple as is reasonable.

The close involvement of the business community and their professional advisers at this stage of the planning will ensure the most practical and simple system is put in place. These professionals are intimately aware of the needs of business and have the capacity and expertise to complete preparation for implementation of the Goods and Services Tax.

We have therefore decided to establish a full-time Goods and Services Tax Planning and Co-ordination Office.

The distinguished Australian Sir William Cole will be Chairman, supported by a small Board of Management.

We have accepted the offer of the Institute of Chartered Accountants in Australia to assist in organising the establishment of the Goods and Services Tax Planning and Co-ordination Office. The Board will act independently to consult with the Australian business community on all administrative features of the Goods and

Services Tax consistent with the announced policy.

The Board and its seconded professional advisers will receive submissions and comment upon the implementation of the Goods and Services Tax, make recommendations to the Coalition on all aspects of the implementation of the Goods and Services Tax and prepare a draft of the necessary legislation.

In government, the Liberal and National Parties will maintain the Goods and Services Tax Planning and Co-ordination Office and expand its functions. In addition to conducting an ongoing educational program, the Office will respond to the enquiries of business and consumers regarding the detail of the Goods and Services Tax and its likely impact on various groups. It will also provide published information and telephone responses on aspects of implementing the Goods and Services Tax and will cover any special transitory arrangements.

Chapter 9 149

It is not the intention of the Office to replace the

information source on the Goods and Services Tax bureaucratic and more user-oriented group is better the concerns of business and other groups.

Taxation Office as the sole • However, a smaller, less placed to hear and address

References

Reform of the Australian Tax System, Draft White Paper, June 1985

2, Department of the Treasury, "Voluntary Compliance • A Corporate Responsible", prepared by the Northern Primary Audit Managers for the Business Management Committee, 22 February 1991

150

Chapter 9

10. COMPENSATION FOR GOODS AND SERVICES TAX

THE TECHNICAL ASPECTS

10.1 KEY DECISIONS

The Coalition will compensate Australians for the net one-off price effect of the Goods and Services Tax package, estimated to average 4.4 per cent of the Consumer Price Index (excluding tobacco), as follows:

10.1.1 Income Compensation

All pensions will be increased by eight per cent;

Age, Disability Support, Wives', Widows', War Widows', Sole Parents', Service, Disability and Carers' pensions;

Other social security benefits and allowances will be increased by six per cent;

Income tax related benefits (sole parent rebates, etc) will be increased by 4.8 per cent.

10.1.2 Wealth Compensation

Australians aged 60 years and over with taxable incomes below $30,000, will be eligible for a one-off wealth compensation rebate at the rate of five per cent, up to a limit of $2,500, on their interest earning savings;

The question of extending wealth compensation to shares will be reviewed by the Goods and Services Tax Co-ordination and Planning Office;

10.2 INTRODUCTION

The purpose of introducing the Goods and Services Tax is to provide Australians with a simpler and fairer tax system and, as a result, with a more productive and competitive economy in which there are expanding opportunities and an increasing number of jobs. The purpose of our taxation reform is not to impose new burdens on vulnerable groups in the community, many of whom have fared particularly poorly under the Hawke/Keating Government of the past 8 years.

Chapter 10 151

When the Liberal and National Parties decided in August 1990 to adopt a Goods

and Services Tax as part of our tax reform program, we also said we would compensate taxpayers, as well as pensioners, other beneficiaries and low income Australians for the impact of the Goods and Services Tax on their cost of living.

Australians can be divided into three broad groups for purposes of income compensation for the Goods and Services Tax:

(a) Australians who are wholly dependent on taxable incomes.. These people will be compensated by cuts in income tax rates and an increase in the tax free threshold. The extremely low income group, at or near the threshold point, may need to be compensated by a new GST Tax Credit.

(b) Australians who are wholly dependent on a pension or other social security benefit. These people will be compensated by increases in their pension and benefits.

(c) Australians who are partly dependent on social security and partly dependent on their own source of income. Some of the people in this category can not be wholly compensated through the tax and social security systems. To make up for any difference, they will receive the new GST Tax Credit and be entitled to a direct wealth compensation payment.

In addition, the aged low income group will be eligible for compensation for the impact of the Goods and Service Tax on their liquid financial wealth.

In calculating our approach to compensation, the Coalition has decided to compensate for the one-off price effect on disposable income. In compensating income, we have thereby compensated for the price effects on the two components of income, namely expenditure and savings. Strictly speaking, the impact of the Goods and Services Tax on the flow of savings - which is in effect deferred expenditure - could be compensated for at the time of expenditure. We make no apology for this decision to over-compensate, as it reinforces our commitment to ensure that the package is fair and encourages saving. It should be recognised

that we are over compensating in four main ways:

We are compensating for income, which front-end loads the compensation payment;

We are over compensating by giving a bigger increase than the identified CPI effect;

We are over compensating by using the CPI rather than a more broadly based measure such as the Non-Farm GDP Deflator;

We are compensating for the net impact of the Goods and Services Tax on wealth for older people on low incomes who have financial assets

15 2 Chapter 10

10.3 THE STARTING POINT: THE NET PRICE IMPACT OF THE GST

The starting point for the compensation exercise is the estimates of the net price effect of the indirect tax changes. Table 10.1 shows the estimated price impacts for various community groups by income decile.

There are 6753 households in the Household Expenditure Survey (HES) sample after excluding the 472 households from the full HES sample that are statistical outliers (see note (1) to Table 10.1).

When the population weights are applied to this sample, it translates into 5.53 million households. Table 10.2 shows the relative significance of each of the community groups.

153

Chapter 10

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154 Chapter 10

Notes:

The price effects of the Goods and Services Tax have been estimated using the HES sample (7225 households) excluding 472 households that either have negative ratios of expenditure to income or ratios in' excess of 2.5. These were excluded on the grounds that such households were not in a sustainable position or were statistical outliers.

2. On the basis of the criterion for inclusion (see Note 1), there are insufficient farmers to draw meaningful conclusions about that group.

3. Each group is identified according to head of household. This is not always an accurate indication of the community group status of all members of the household.

4. Price effects exclude tobacco.

Chapter 10 155

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10.4 DETERMINATION OF THE COMPENSATION FACTORS

It is evident from Table 10.1 that the price effects vary across groups and across income deciles. In determining the indexation factors, it is also relevant to consider the incomes of each group. Table 10.3 shows the average income in each decile for the fourteen community groups identified in Tables 10.1 and 10.2.

The weighted average price effect of the Goods and Services Tax (excluding tobacco) for all groups is 4.94 per cent. This exceeds the CPI estimate of 4.4 per cent (excluding tobacco) because the average price effect is based on HES expenditure weights and includes all types of households, whereas the CPI has

different weights, includes only wage and salary earners, is based on the eight capital cities only and excludes those on the highest incomes.

The 4.4 per cent CPI effect (excluding tobacco) is regarded as a reasonable indexation factor for compensating wage and salary earners on average through adjustments to the income tax system (using the formula enunciated by Wright and Henry - the Government's Goods and . Services Tax scare campaign

technicians) or by GST Tax Credits. To allow a margin for comfort, 4.8 per cent has been used as the compensation factor for wage and salary earners.

The social security tax expenditures have also been adjusted by 4.8 per cent. These include the Dependant Spouse Rebate (including housekeeper and daughter-keeper), sole parent rebate and the rebate for parent and parent-in-law. In each case, the amount of the rebate, the withdrawal rate and the income level at which

the withdrawal rate cuts in have been indexed by 4.8 per cent. This approach is designed to preserve the real value of these rebates.

The income tax rebates for pensioners, repatriation pensioners, and unemployment, sickness and special beneficiaries also have been adjusted, but on a different basis because of the refundable tax credits for this group. This is discussed in Section 10.4.2 below.

The price impact for those on government pensions and benefits (groups 9,11-13) is larger, on average, than for wage and salary earners. In particular, there are a few lower income deciles in receipt of government pensions that have price effects of more than 7 per cent. Those in receipt of unemployment and sickness benefits (group 9) have a price effect of only 4.3 per cent on average, while only

one decile has a price effect of greater than 5 per cent.

Again, to allow a margin to cover the variety of price effects that are contained within the averages, the compensation factor for those receiving government benefits was set at 6 per cent, and for those receiving government pensions an 8 per cent compensation factor was adopted.

The main social security benefits and pensions that have been included in the estimates of compensation presented below are as follows:

158 Chapter 10

TABLE 10.4

Benefits Pensions

Unemployment (JSA) Age

Sickness Disability Support

Special Benefit Wives

Family Allowance Widows

Family Allow Supplement Sole Parents

AUSTUDY Service

Abstudy War Widows

Carer's

Indexed by: 6 per cent Indexed by: 8 per cent

10.5 DESIGNING THE COMPENSATION PACKAGE

10.5.1 Employed Non•Social Security Beneficiaries or Pensioners

For those in employment and not in receipt of a government pension or benefit, there can be up to three forms of income compensation, as follows:

the Wright/Henry "formula" adjustment of the income tax system using an indexation factor of 4.8 per cent. For most people in employment and not in receipt of a government pension or benefit this will be the only form of

compensation;

indexation of tax rebates (dependent spouse, sole parent, parent-in-law), as described in Section 10.4; and

a refundable GST Tax Credit for those with taxable incomes below their post-GST tax-free threshold.

For those with taxable incomes up to their pre-GST tax-free threshold, the GST Tax Credit is equal to 4.8 per cent of their taxable income. The amount of the GST Tax Credit would fall as taxable income rose above the pre-GST tax-free threshold until it cut out when taxable income reached the post-GST tax-free threshold. The GST Tax Credit protects the real value of the incomes of low income earners who do not benefit at all or only receive partial compensation from the increase in the tax-free threshold. For example, for a single taxpayer with a taxable income of $5,400 a GST Tax Credit of $259 would be paid ($5,400 x 0.048).

The amount of the GST Tax Credit would fall as taxable income rose above the pre-GST tax-free threshold until it was zero when taxable income reached the post-GST tax-free threshold ($7000 for a single taxpayer).

Chapter 10 159

Effectively, those in receipt of a GST Tax Credit with incomes above $5,400 would

face a marginal tax rate of 16.2 per cent (because the GST Tax Credit would be withdrawn at a rate of 16.2 cents for each $1 of taxable income over the range $5,400 to $7,000), compared with a 20 per cent marginal tax rate over this range previously. That is, the abatement rate between $5,400 and $7,000 would equal the marginal tax rate for taxpayers above $7,000.

The advantage of this approach is that preservation of the real value of the GST Tax Credit in subsequent years requires only that the maximum value of the GST Tax Credit and the pre-GST and post-GST tax thresholds be indexed. The administrative burden on low income earners and the Taxation Office will be

relatively light. Low income earners will be required to complete, once a year, a GST Tax Credit claim form which will be included with the Tax Pack mailed to every household in Australia and available from Post Offices. The form will simply require a statement of income and evidence of having received such income, for example, a group certificate.

The system could include allowance for variations in the tax-free threshold according to family circumstances, as shown in Table 10.5.

TABLE 10.5

Category Pre-GST

tax-free threshold

Post-GST tax-free threshold

Maximum GST Tax credit

Single $ 5,400 $ 7,000 $336

Married with dependent spouse $10,800 $14,000 $518

Married with dependent spouse and children $11,880 $15,400 $570

Sole parent

$10,475 $13,579 $503

GST Tax Credits will be paid quarterly.

It is estimated that 2.3 million low income earners not receiving a basic pension or benefit will be eligible for GST Tax Credits. GST Tax Credits to those not in receipt of a basic pension or benefit would be paid by the Taxation Office. The total cost of GST Tax Credits is estimated to be around $300 million, derived as

shown in Table 10.6.

160 Chapter 10

TABLE 10.6

Category Number GST Average

('000) Tax Credit GST Tax

($m) Credit

($)

Single 436.7 47.1 108.0

Primary earner spouse married (no children 448.1 72.8 163.0

Primary earner spous e married (children) 348.0 82.7 238.0

Secondary earner spouse 1056.4 86.5 81.9

Sole parent 38.7 7.5 193.5

Total 2327.9 296.6 127.4

10.5.2 Social Security Beneficiaries and Pensioners

The objective of compensation for pensioners and beneficiaries is to increase their disposable pension and benefit by 8 per cent and 6 per cent, respectively, and to increase their disposable non-pension income by 4.8 per cent. Achievement of this objective will involve a steady reduction in the rate of compensation from 8 per

cent for a full pensioner and 6 per cent for a full beneficiary earning up to their tax-free limits, to 4.8 per cent at the point where the pension or benefit is fully withdrawn.

The difficulty in achieving this outcome in practice is that at present (before introduction of the Goods and Services Tax), pensioners' and beneficiaries' disposable incomes are the net result of:

the withdrawal rate applying to pensions/benefits after non-pension income exceeds an income limit (for example, $40 per week for a single pensioner);

the pensioner/beneficiary tax rebate and its withdrawal rate; and

the income tax system.

The situation for a single pensioner (assuming no children or rent allowance) on average in 1990-91 was:

they received a pension of $7734 per annum (for second half of 1990-91);

once non-pension income exceeded $2085.7 per annum, the pension was withdrawn at a rate of 50 per cent;

the pension was fully withdrawn at total annual income of $17,554 (= (2 x 7734) + 2085.7);

Chapter 10 161

a pensioner income tax rebate of $912' pushed out the pensioner's tax-free

threshold from $5,400 to $9,960' (912=(9,960-5,400)x0.2, where 0.2 is the lowest marginal tax rate). The pensioner income tax rebate ensures that the first $2,085.7 per annum of non-pension income is free of income tax; and

the pensioner tax rebate is withdrawn at the rate of 12.5 per cent. It is fully withdrawn at an annual income of $17,256' (=$9,960+($912/0.125)).

This hotch-potch of benefits produces the following effective marginal tax rate schedule for a single pensioner:

TABLE 10.7

Non-pension income $ per week

Effective marginal tax rate

0-40 0

40 - 50 63.8

60 - 310 66.25

310 - 320 63.26

324 - 330 ' 60.0

330 - 340 46.6

340 - 397 20

398 38

The impact of the two main Goods and Services Tax compensation measures - the income tax formula adjustment and the change to the rate of of pensions and benefits in line with the factors set out in Section 10.3 is to:

alter the income tax scale according to the Wright/Henry formula.'' Effectively, this means that disposable income above $7,000 is increased by 4.8 per cent. For pensioners, however, the benefit of the tax cut would only

take effect after taxable income exceeded the old tax-free threshold ($9,699); and

increase the tax free threshold because the tax-free threshold is, in part, determined by the level of the pension/benefit increases as a result of indexation.

In practice, the amounts change due to indexation of the pensions and the change to the tax scales effective 1 January 1991. In the costing, the Tax Pack estimate of the rebate of $912 was used and the pensioner's Tax Pack tax-free threshold of $9,699. On that basis, the pensioner rebate is fully withdrawn at an income of $16,995.

162 Chapter 10

These two adjustments alone do not produce the smooth transition from 8-6 per

cent compensation for full pensioners/bcneficiaries to 4.8 per cent at the point where pensions and benefits are withdrawn. Moreover, pensioners with taxable income less than the new tax-free threshold would not get the benefit of the formula adjustment of the tax system. They require a Goods and Services Tax

credit, just as those not in receipt of a pension or benefit with incomes up to $7,000 require a Goods and Services Tax credit.

The approach to compensating pensioners/beneficiaries has been to:

(i) devise changes to the income tax rebates for pensioners and beneficiaries; and

(ii) introduce GST Tax Credits

that together produce as smooth as possible a transition path from 8-6 per cent compensation for full pensioners/beneficiaries, to 4.8 per cent for those whose pension/benefit is cutting out.

(i) Change to pensioner and beneficiary rebates

The rebates for pensioners and beneficiaries have been changed, as follows:

the income level at which the rebate begins to be withdrawn has been increased to reflect indexation of the pension/benefit. For example, for a single pensioner, the threshold increases by $619 (=$7734 x 0.08) from

$9,699 to $10,318;

the rebate is set so that no tax is paid at this new threshold ($10,318). The rebate is, therefore, the difference between the new threshold ($10,318) and the personal income tax tax-free threshold ($7,000) times the first marginal tax rate (16.2 per cent). Therefore, the rebate is $536; and

the rebate withdrawal rate is set so that the rebate is withdrawn between the threshold ($10,318) and when the pension runs out ($17,554). That is, $536/$7,236 = 7.4 per cent.

The effect of these changes on the rebate arrangements are shown in Table 10.8.

Chapter 10 163

TABLE 10.8

Category PRE-GST POST-GST

Rebate Threshol W drawal Rebate Threshol W'drawal

d Rate d Rate

($) % ($) %

Pensioner Single 912 9699 .125 536 10318 .071

Pensioner Married 599 8172 .125 251 8559 .041

Beneficiary Single 415 7275 .125 113 7702 .056

Beneficiary Married 545 13177 .125 0 13951 0

(no children)

(ii) GST Tax Credit for Pensioners/Beneficiaries

The GST Tax Credit is in addition to compensation in the form of pension/benefit indexation, indexation of the pensioner rebate and the formula adjustment of the income tax scales.

The GST Tax Credit for pensioners serves a similar purpose to the GST Tax Credit for those who are employed and not on a government pension or benefit. That is, in both cases, the GST Tax Credit provides compensation to those on low incomes who do not benefit at all or who only benefit partially from the formula

adjustment to the income tax system.

The pensioner/beneficiary GST Tax Credit applies to pensioners'/beneficiaries' non-pension income at 4,8 per cent, the same indexation rate as applies for all tax-related adjustments. The GST Tax Credit scheme works as follows:

if total taxable income (pension and non-pension) is less than the (new) tax-free threshold, then the GST Tax Credit is equal to all non-pension income indexed by 4.8 per cent;

if total taxable income falls between the (new) tax-free threshold and the income level at which the pension/benefit cuts out, then the indexation factor applied to all non-pension income is scaled down at a steady rate from 4.8 per cent at the (new) tax-free threshold to 0 per cent at the point

where the pension/benefit cuts out 2; and

The GST tax credit (RTC) is calculated as follows:

YIN = Non-pension income

164 Chapter 10

if total taxable income exceeds the income level at which the pension/benefit

cuts out, then the GST Tax Credit is zero.

The range of taxable income over which the GST Tax Credit applies by type of pensioner/beneficiary and the maximum GST Tax Credit are shown in Table 10.9.

TABLE 10.9

Post GST Income at which Maximum

tax free threshold pension/benefit GST credit 1E

cuts out I^

($) ($) ($) 41

Pensioner - single 10318 17554 235 1^

Pensioner - married 8558 14723 194

Beneficiary - single 7702 9729 28

Beneficiary - married 13951 15505 26

(no children)

GST Tax Credits to pensioners and beneficiaries will be paid automatically by the Department of Social Security as a separately identified increment to pensions and benefits. The amount of the credit will be calculated by the Department using information already supplied to it by pensioners and beneficiaries. Because

pensioners already inform the Department of the level of their non-pension income, pensioners/beneficiaries will not have to fill in new form. Also, payment would be made automatically through the existing delivery system in fortnightly instalments, avoiding potential difficulties in budgeting by pensioners that may

occur if payment were made in quarterly instalments.

It is estimated that 1 million pensioners and beneficiaries would be eligible for GST Tax Credits. The total cost of GST Tax Credits for pensioners and beneficiaries is estimated to be around $62 million, derived as shown in Table 10.10.

XIN = Taxable income NTFT = New tax-free threshold PI3CO = Income at which pension/benefit cuts out

(i) If, XIN < NTFT and RTCR is the RTC rate, then RTC = RTCR* YIN

(ii) If, XIN > PBCO then RTC = 0.0

(iii) If, NTFT < XIN < PBCO and RTCR is the RTC rate, then RTC = YIN * RTCR (1 - ((XIN • NTFT)/(PBCO • NTFT)))

Chapter 10 165

TABLE 10.10

Category Number

('000)

GST

Tax Credit $ million

Average GST Tax Credit $

Pensioner - single 422.8 31.3 74

Pensioner - married 511.8 27.8 54

Beneficiary - single 22.2 0.6 25

Beneficiary - married 48.3 2.1 44

Total pensioners/ 1005.1 61.8 61

beneficiaries

It is not the intention of the income compensation measures offered to social security beneficiaries to be used by State Governments as an opportunity to reduce their benefits or increase their charges for services, e.g. rent payable on public housing. Appropriate negotiation will take place with all State Governments to

avoid such an outcome.

This approach is consistent with the recent Federal Government practice when pensioners were compensated $2.50 per week for the introduction of the $2.50 charge on pharmaceuticals. The State Governments agreed not to use this increase to alter their assistance arrangements.

10.5.3 GST Tax Credit For Retired Non-Pensioners Below 60 Years of Age

Australians aged 60 years or more are eligible for wealth compensation in addition to GST Tax Credits and the formula adjustment of the income tax. system. Those aged below 60 years who are retired but not on a government pension or benefit are not eligible for wealth compensation. Compensation for this group in the form

of the formula adjustment of the tax system and by GST Tax Credits will ensure that their disposable incomes increase by 4.8 per cent. This will be low relative to those aged 60 or more who receive wealth compensation and will be low relative to pensioners and beneficiaries.

To boost the compensation factor for this group a special GST Tax Credit has been designed for those who are:

aged under 60 years and, if married, the spouse also must be aged under 60 years;

not in the workforce and, if married, the spouse also must not be in the workforce; and

not in receipt of a government pension or benefit and, if married the spouse also must not be in receipt of a government pension or benefit.

166

Chapter 10

Those who meet these criteria are eligible for a GST Tax Credit equal to 7.25 per

cent of income up to $20,000, That is, they are eligible for a maximum credit of $1450. There are 410,700 thousand people who are eligible for this special GST Tax Credit at a cost of $85.9 million.

10.5.4 Total GST Tax Credits

Taking the three groups eligible for GST Tax Credits, the total amount of payments will be $444.3 milliozi; derived as shown in Table 10.11.

TABLE 10.11

Category Number GST Average

Tax Credit GST Tax Credit

('400) $ million $

Pensioners/beneficiaries 1005.1 61.8 61

Employed not on government benefit or pension 2327.9 296.6 127

Special (under 60) 410.7 85.9 209

Grand Total 3743.7 444.3 199

Over 3.7 million people would be eligible to receive a GST Tax Credit.

10.6 THE OVERALL COST OF INCOME COMPENSATION

The overall cost of the compensation measures described above is $2560 million, comprising about $2.1 billion for the cost of indexation of pensions by 8 per cent and benefits by 6 per cent and $444 million for the GST Tax Credits.

The cost of indexation of the DSR and SPR is estimated to be $66 million but this is broadly offset by the saving of $43 million from the changes to the pensioner/beneficiary rebates.

10.7 TIMING

Currently, people with indexed pensions and benefits receive income compensation in line with movements in the CPI. However, adjustments are made only twice yearly and pensioners and beneficiaries must wait up to six weeks for compensation after the CPI result is known.

Under these circumstances, the aged, low income families and other disadvantaged persons would be out of pocket for a period after the initial impact of the GST.

Chapter 10 167

To overcome this problem an advance payment will be provided as from 1 October

1994 and taken into account in the final indexed adjustment of compensation benefits.

10.8 WEALTH COMPENSATION

Although the measures outlined above will more than compensate for the loss of purchasing power of low income earners and pensioners, there is still the matter of compensating retirees for the loss of value of their accumulated savings.

This will occur to the extent that the impact of GST on the CPI will reduce the value of savings by an equivalent percentage, eg. 4.4 per cent.

Adverse wealth effects due to the one-off CPI effects of the taxation reform package are largely confined to people holding their wealth in the form of deposits with financial institutions. Such deposits are fixed in dollar terms and, therefore, their purchasing power falls to the extent of the price raising effect of the package.

Other forms of wealth, not fixed in dollar terms, will more or less adjust in value in response to the price impact of the package. Commercial property will be input taxed under the GST and, like residential property, is expected to increase in value in real terms.

The impact of the Goods and Services Tax on wealth held in the form of equities is unclear, although a reasonable presumption would be that the Goods and Services Tax would not alter the relative rate of return on investment in the form of equities. If so, the underlying values of share prices - the expected stream of

future corporate profits - would be adjusted to the extent necessary to maintain the real value of shares.

The 1985 Draft White Paper on Reform of the Australian Tax System on Page 150 said there was no need for wealth compensation. To quote directly:

"Overall there may be a modest fall in the real value of private wealth holding ... To the extent that any detriment is correlated with the size of net wealth holdings, it may be inversely related to the need of the asset-holder. A partial exception may be social security recipients such as elderly retired persons who are running down modest private resources to finance their

consumption in retirement. Many of these (ie. those having significant private income), however, may receive compensation through both the taxation and social security systems. The Government considers that it would not be practicable, even if it were desirable, to compensate

systematically for the pattern of changes in the value of private wealth holdings. " Ref 2

168 Chapter 10

The Coalition does not agree with these conclusions and we believe that the Labor

Government's inability to adequately address the question of wealth compensation for older members of the community was one of the reasons why Prime Minister Hawke and Treasurer Keating failed in their attempt to introduce a consumption tax in 1985.

The argument for compensating for the adverse wealth effect of the package is strongest for older members of the community who have retired from the workforce, and in many cases are living on those savings.

Aged persons have built up their wealth by saving and prudent investment after paying income tax during their working lives. They did this in the expectation of being able to run-down their savings to support themselves in their retirement years. There is a strong case on equity grounds for protecting the purchasing

power of aged persons' savings since they would otherwise be taxed twice - once when they paid relatively high personal income tax rates on earning their income and again when they pay Goods and Services Tax as they consume their savings.

Those who are still in the workforce will suffer an adverse wealth effect to the extent that they have assets in the form of financial deposits. However, they will receive an on-going benefit from the cuts in income taxes introduced as part of the Goods and Services Tax package arid from the greater employment opportunities

which will open up under our policies. For taxpayers with incomes in excess of $20,700, the tax cuts are well in excess of what is required to maintain the purchasing power and savings potential of their after tax incomes.

Taking all these factors into account, the Coalition has decided to compensate low and middle income retirees for the net price impact of the Goods and Services Tax on the value of interest earning financial assets (e.g. bank deposits, bonds). However, in view of the difficulty of determining whether this should be extended

to equities, we have asked Sir William Cole, Chairman of the GST Planning and Co-ordination Office, to take submissions on this matter. Whatever the outcome of these considerations, the Coalition guarantees to spend $1.4 billion on wealth compensation.

The following costing is done on the basis of financial holdings only.

Data on holdings of financial deposits by age are not readily available. Accordingly, to arrive at a guesstimate of the cost of a program of wealth compensation for aged persons it has been necessary to impute the value of financial deposits from HES data on the income reported by respondents from holdings of financial assets.

Chapter 10 169

10.8.1 Wealth Compensation Costing Objective

Compensation for the net CPI effect of the 15 per cent Goods and Services Tax package on holdings of interest-earning, capital stable, liquid assets is to be provided to individual taxpayers:

aged 60 years and over;

whose taxable incomes are less than $30,000 per annum;

with a "phasing out" range for wealth compensation over the taxable income range from $20,000 to $30,000 (eg. at $20,000, full wealth compensation -subject to a cap (see below) - applies, at $25,000, 50 per cent wealth compensation applies and at $30,000 wealth compensation is zero).

10.8.2 Methodology

The costing below is based on Household Expenditure Survey (HES) data for individuals aged 60 years and over with taxable incomes up to $30,000. Estimates of the relevant stock (W) of interest-earning liquid assets are imputed by dividing interest income reported in the HES (I) by an assumed interest rate (i). That is, W=Ui.

Compensation is assumed to be paid at a rate of 5 per cent (ie. slightly higher than the estimated average CPI effect of the 15 per cent Goods and Services Tax of 4.7 per cent - or 4.4 per cent excluding tobacco). The cost of compensation will

be sensitive to the assumed average interest and compensation rates. A lower interest rate implies a larger stock of wealth, and vice versa.

10.8.3 Cost Estimates

The tables below set out estimates of the cost of wealth compensation on the basis outlined above.

170 Chapter 10

TABLE 10.12

ESTIMATED COST OF WEALTH COMPENSATION - NO CAP

Number of Imputed Eligible Cost of

Taxpayers Wealth Stock (a) Wealth rebate (b)

(million) ($ million) ($ million)

7% Interest Rate 2.441 (c) 42,139 1,938

2.686 (d) 46,597 2,149

10% Interest Rate 2.441 (c) 29,495 1,356

2.686(d) 32,619 1,504

Notes:

(a) Obtained by dividing interest income by the assumed interest rate. (b) Assumes a rebate equal to 5 per cent of the eligible wealth stock, phased down to zero over the taxable income range from $20,000 to $30,000, with no rebate cap (c) All single adults aged 60 or more who meet the income test for some wealth compensation. (d) Single adults plus married couples with at least one spouse aged 60 years or more

qualifying for compensation, where both spouses are assumed to receive compensation

If the cost of compensation were to be further limited, a cap could be placed on the size of the Goods and Services Tax wealth rebate. Assuming a 7 per cent interest rate, for example, the costing in the above table would be modified as shown in Table 10.13.

TABLE 10.13

ESTIMATED COST OF WEALTH COMPENSATION WITH VARIOUS CAPS

Cap of Cap of Cap of No Cap

$1,000 $2,500 $5,000

($ million) ($ million) ($ million) ($ million)

Wealth Compensation 863 (a) 1,321 (a) 1,664 (a) 1,938 (a)

(7% interest rate) 957 (b) 1,473 (b) 1,858 (b) 2,149 (b)

Notes:

(a) All single adults aged 60 or more who meet the income test for some wealth compensation. (b) Single adults plus married couples with either spouse aged 60 years or more qualifying for compensation, where both spouses are assumed to receive compensation.

Chapter 10

171

In short, the HES data, using the Warren STATAX model, suggest that, on the

interest rate assumptions used here, income-tested wealth compensating for taxpayers aged 60 years and over for their interest-earning savings would cost between about $1 billion and $2 billion if no rebate cap applies.

We have decided to provide wealth compensation, with a cap of $2,500, for single persons over the age of 60 as well as married couples where at least one spouse is aged 60 years or more. This will cost $1,473 million.

10.8.4 The Mechanics: How The Australian Taxation Office Will Deliver Wealth Compensation

The value of the Goods and Services Tax wealth rebate to eligible taxpayers will be calculated by the Australian Taxation Office, based on individual circumstances. For pensioners, the Department of Social Security would administer wealth compensation in conjunction with its responsibility for GST Tax Credits for pensioners.

The ATO could proceed as follows:

(i) determine age eligibility and income eligibility from their tax return;

(ii) for eligible taxpayers, impute their eligible wealth stock from their interest income from the 1992/93 tax returns based on an assumed average interest rate (the interest rate average compiled for the Tax Free Savings scheme purposes could be used for this purpose);

(iii) remit a refundable tax credit equal to 5 per cent of (ii) - or a lesser amount if a rebate cap applies - to eligible taxpayers as part of the ATO's assessment for 1993-94 (payments being made over the middle months of 1994-95).

The wealth rebate is intended to maintain the real value of the stock of wealth at the time of introduction of the Goods and Services Tax policy. Therefore it is expected that recipients will retain the rebate as savings because to do otherwise would be a change in behaviour. Therefore the wealth compensation package is both equitable and also macro economically sound.

The wealth compensation also provides a source, through interest accruing on the wealth rebate, of further income compensation as explained in the attached Attachment 1. Illustrations of this over-compensation are contained in Attachment 2.

172 Chapter 10

ATTACHMENT I

COMPENSATION: THE LINKS BETWEEN CONSUMPTION, INCOME AND WEALTH

By definition, income (Y) is allocated to consumption (C) or saving (S). Saving is the increment to wealth (aW). That increment can be positive, zero or negative. That is, in any period:

Y — C+S

= C+nW

= C+(W,-W0)

where subscripts 1 and 0 refer to the end and the beginning of the period, respectively.

Interpreting these magnitudes as after-tax, real magnitudes, how does the Goods and Services Tax price compensation process apply? Either income tax cuts, and/or government benefit increases, and/or Goods and Services Tax refundable tax credits and/or wealth compensation payments are used to maintain income and wealth unchanged in real terms.

That is, if the GST price index effect is p:

Compensated Income, Y*, is: Y* = Y(1+P)

Compensated Wealth, W*, is: W* Wo(1+p)

But consumption before income and wealth compensation was: C = Y-(W,-W0)

So compensated consumption, C*, is: C* = Y - (W, - W0)

= Y(1 + p) - (W 1 - Wa).(1 + P)

(1 + p).[Y - (W t - W0)] = C.(1+p)

That is, in general, income compensation combined with wealth compensation finances consumption compensation over time.

And, in general, any shortfall either of income compensation or of wealth compensation implies that there will be less than full consumption compensation over time.

But what if income is solely determined by interest on savings? That is, in any period:

Y -- i.W0 i = constant

Chapter 10 173

If

consumption before income and wealth compensation is: C =U+ONO-W,

then compensated consumption, C*, is: C* _ (1 + p).[(1 + i).W 0 - Wt] =(1+p).[Y- (W1 - Wo)] (1 + p).0

That is, in this case wealth compensation alone is sufficient to deliver consumption compensation and maintain living standards. More specifically:

if income from wealth is not subject to income tax, a one-off wealth compensation rebate is all that is needed: no further annual Goods and Services Tax income tax rebates are required because the larger stock of wealth itself generates a larger stream of income;

if income from wealth is subject to income tax, the indexation of the income tax rate scale (inclusive of Goods and Services Tax credits) plus a one-off wealth rebate are sufficient to compensate income from wealth for the prime effects of the Goods and Services Tax.

So does the combination of income and wealth compensation involve double-counting? It depends on the immediate compensation target.

Two broad cases can be envisaged:

(a) For as long as Y> C or Y = C, full income compensation, including income generated from wealth, is sufficient to maintain living standards as measured by consumption. (This does not imply that the real value of wealth i preserved, only that wealth stocks are not being called on to finance living standards. There will be a reduction in the real value of

capital-stable interest earning assets at the time the Goods and Services Tax is introduced, possibly - depending upon interest rate effects - offset after a time by higher after-tax rates of interest).

(b) But when Y C, full income compensation is not by itself sufficient to maintain real living standards as measured by consumption. Consumption is being financed in part by a run-down in wealth. Wealth compensation is needed to preserve the real value of the stock of that wealth, and thereby the capacity to finance real living standards out of that wealth.

Case (b) is especially relevant for older people in retirement, and less generally applicable to other taxpayers. Assuming that consumption compensation - the maintenance of real living standards - is the objective, that is an economic justification for concentrating wealth compensation on the aged.

174 Chapter 10

ATTACHMENT 2

INCOME/WEALTH COMPENSATION: SOME ILLUSTRATIONS OF OVER -COMPENSATION

Assumptions

Interest rate at 10 per cent. Income comes solely from interest income on wealth.

• Real value of wealth at end of period is unchanged in the post-GST compensation case relative to the pre-GST case.

• Compensation - income and wealth - is at 5 per cent.

• Living standards are measured by consumption.

W = wealth; Y = income; C = consumption

Case A - No Consumption of Wealth, but Income and Wealth Compensation of five per cent

Pre - GST Post - GST

Wo _ 100 Wo

Y = 10 Y

C = 10 C

W 1 = 100 W,

ie. (105 x 0.10) x (1.05)

Increase in consumption = (11.025 - 10)/10 = 10.:

required 5 per cent compensation.

= 105

_ 11.025*

11.025

_ 105

.5 per cent - more than double the

Case B - Consumption Double Income From Wealth

Pre - GST Post - GST

= 105

_ 11.025

_ 21.525*

_ 94.5

625 per cent - more than 50 per

w e = 100 Wa

Y _ 10 Y

C = 20 C

W F = 90 Wl

ie. (105 x 0.10) x (1.05) + 10.5

Increase in consumption = (21.525 - 20)/20 = 7.

cent over the required 5 per cent compensation

Chapter 10 175

Case C - Consumption Exhausts Wealth In One Period

Pre - GST Post - GST

Wa = 100 Wo — 105

Y = 0 Y - 0

C = 100 C = 105

W 1 _ 0 Wl _ 0

Increase in consumption = (105 - 100)/100 = 5 per cent - exactly the required 5 per

cent compensation

Case D - Consumption Less Than Income From Wealth

Pre - GST Post - GST

Wo = 100 Wo = 105

Y = 10 Y = 11.025

C 5 C = 5.775

W l _ 105 W, = 110.25*

* ie, (105 x 1.05)

Increase in consumption = (5.775 - 5)/5 = 15.5 per cent - more than three times the required 5 per cent compensation

References

1. J.S. Wright & KR. Henry Some Central Issues in an Expenditure /Income Tax Switch Economists Conference, Monash University 1985

2. Reform of the Australian Tax System, Draft White Paper, p 150, June 1985

176 Chapter 10

11. ASSISTANCE TO FAMILIES

11.1 INTRODUCTION

The Liberal and National Parties have always placed special emphasis on the family.

The family is the central building block of society. It provides the most effective means for the care and development of children. It is a source of security, stability and values, both personal and social.

When the family unit is undermined, as it has been in recent years through increased economic and social hardship, the self reliance of families tends to be lost and individual responsibility eroded. In its place has emerged greater dependence on government - often long term dependence. This provides the setting for social dislocation and disintegration.

The Coalition will substantially reduce the burden which millions of Australian families have had to carry under Labor. We will do this primarily through the tax system, through reform of the labour market and where necessary, through the social security system. And we want to ensure that where additional family

assistance is provided through the expenditure system it goes to those who most need it.

The "Fightback" policy package contains many initiatives which will be of great benefit to Australian families labouring under the weight of the current recession.

11.2 A PROVEN APPROACH TO FAMILY ASSISTANCE

In constructing our direct family assistance package, a number of alternatives were examined:

introduction of new tax rebates for children;

introduction of additional assistance for child care through a new tax rebate or through additional expenditure;

a move towards income splitting in the tax system;

changes to the existing rebate for the dependant spouse; and

additional assistance in the form of family allowances and/or family allowance supplement.

Chapter 11 177

After consideration of these alternatives, it was been decided that the benefits

provided should be channelled primarily through the existing tax and experidi Lure systems in the form of additions to the Family Allowance and Dependant Spouse Rebates but this assistance should be better targeted - specifically, the eligibility for each benefit should be tightened in view of the substantial income tax benefits

accruing to people earning more than $40,000. The benefits of this approach are that:

it is based on a system already in place and understood by the community;

• the bulk of the benefits flows directly to the principal carer;

• this mechanism leaves the choice as to whether funds are allocated to finance child care or other some expenditure to the family rather than be determined by Government;

• it ensures better targeting of family payments which will mean increased assistance for those families who most need it;

it is consistent with our approach to increase the emphasis on funding children rather than trying to favour particular family structures,

Accordingly, in government we will take the following initiatives:

11.3 FAMILY ALLOWANCES

In 1990/91, married couple households with dependent children comprised about 42 per cent of the population and sole parents made up a further 10 per cent.

In the same year, Family Allowances were paid to approximately 1.9 million families on behalf of 3.7 million children. The Family Allowance Supplement for low income families was paid to 187,000 families to cover 455,500 children,

In view of the substantial gains to families with combined incomes above $40,000 under our proposed tax reform package, the reliance of these families on Family Allowance payments is lessened. However, the Coalition believes that families

with incomes below $40,000 should receive additional assistance for the cost of bringing up their children. Accordingly:

Family Allowance will be doubled for families with combined incomes below $30,000 per annum;

families with combined incomes between $30,000 and $40,000 will have their Family Allowances increased by 50 per cent;

178 Chapter I1

families with combined incomes over $40,000 will receive a six per cent

increase in their Family Allowances. In the interests of better targeting, the graduated income scales at which Family Allowance cuts out will be slightly reduced;

sole parents will have their pensions increased by eight per cent and all additional children's allowances will be increased by six per cent.

The new payment structures for Family Allowance will be :

Up to $30,000

No. of Children

New Rate Per Fortnigh t Old Rate

1 $40.00 $20.00

2 $ 80.00 $ 40.00

3 $120.00 $ 60.00

4 $173.40 $ 86.70

5 $226.80 $113.40

extra child $ 53.40 $ 26.70

Between $30,000 - $40,000

No. of Children

New Rate Per Fortnight Old Rate

I $ 30.00 $20.00

2 $ 60.00 $ 40.00

3 $90.00 $60.00

4 $130.05 $ 86.70

5 $170.10 $113.40

extra child $ 40.05 $ 26.70

For families with a combined income in excess of $40,000, the current rates of Family Allowance will increase by 6 per cent to compensate for the one-off price effect of the Goods and Services Tax with reduced graduated income scales.

chapter ii 179

The new rates will be:

No of children Rate per fortnight

FA not paid if income exceeds

1 $ 21.20 $55,000

2 $ 42,40 $58,000

3 $ 63.60 $61,000

4 $ 91.90 $64,000

5 $120.20 $67,000

extra child $ 28.30 $ 3,000

11.4 FAMILY ALLOWANCE SUPPLEMENT

The Coalition will also maintain the existing Family Allowance Supplement (FAS) scheme to ensure additional assistance goes to low income families. In the 1990/91 Budget the income threshold for Family Allowance Supplement was increased from $18,000 per annum to $19,300 per annum and this will • be maintained. However, as FAS has been increased significantly in recent years, it was decided on this occasion to increase it by six per cent which is clearly more than is necessary to compensate for the 4.4 per cent CPI effect of the Goods and Services Tax*.

The new Family Allowance Supplement rates will be:

Child under 13 plus $82.90 per year to $1,460.90

Child 13-15 plus $120.96 per year to $2,130.96

Child over 15 plus $5 3. 18 pe r year to $937.18

See explanation for this variance in Chapter 10

11.5 DEPENDENT SPOUSE REBATE

As with other rebates, such as the sole parent rebate, the value of the Dependant Spouse Rebate, its withdrawal rate, and income levels at which it begins to reduce will be indexed by 4.8 per cent.

While the Dependant Spouse Rebate (DSR) recognises the contribution of the non-working spouse to the household of one-income couples, the Coalition believes that the DSR should be a better targeted payment allowing for increased assistance to low to middle income families with children.

180 Chapter 1i

The DSR will be increased by $300 per annum for all eligible families with

children. The maximum DSR will be available to one income families with children where income does not exceed $75,000 per annum. One income families without children earning up to $50,000 per annum will be eligible for the DSR but will not receive the additional $300 per annum.

This means that eligible families with children will receive a rebate of $1679 per annum (previously $1379), while families without children will receive $1204 (4.8 per cent on the current level of $1149).

DSR will be phased out for families with incomes in excess of the new limits at the rate of $1 for every $4. This will mean that the rebate for the family without children will cut out completely when income reaches $54,816 and for a family with children the rebate will cut out at $81,716. The separate income test on the non-income earning spouse for the DSR will continue to apply. However, the

separate net income limit will be raised to $295. That is, the rebate reduces by $1 for every $4 when the dependent spouse's income exceeds the new level of $295 per annum cutting out completely when income exceeds $5,112 if there are no children, or $7,012 where there are dependent children.

11.6 CHILD CARE

The Coalition fully recognises the need of working parents for adequate and affordable child care.

While there is no doubt that the most ideal form of child care is in the home, economic and social realities dictate that governments now give due recognition to child care policies which meet the needs of parents in and out of the workplace.

Access to affordable child care is essential for working parents. With more women than ever before seeking to enter and remain in the paid workforce, it is particularly important to ensure that they are not inhibited from doing so by an inability to afford proper child care.

The Coalition is concerned about the adequacy and coverage of the Government's existing child care fee relief scheme.

Accordingly, we strongly believe the present system of fee relief should be reviewed. We are examining a number of options which would provide a suitable system of tax deductibility for a targeted range of Australian families.

Consideration will be given to the approach taken in a recent report prepared by the Taxation Institute of Australia (TIA) on this matter.

Chapter 11 181

One of the favoured options of the TIA is to offer a 20 per cent tax rebate on

maximum child care expenditure of $120 per week per child. This would mean that eligible families would have their child care costs reduced by $24 per week per child. The Coalition will give serious consideration to this and other proposals.

We have set aside $90 million for increased child care support, the full details of which, will be released prior to the next Federal election.

We will also investigate the possibility of limited deductibility for employers for the cost of work-based child care.

11.7 REDEFINITION OF INCOME FOR FAMILY ASSISTANCE

In the interest of better targeting family payments, the basis for assessing eligibility for Family Allowance and AUSTUDY will be changed. At present, eligibility for both Family Allowance and AUSTUDY is assessed against the combined parental taxable income for the financial year ending in the previous

calendar year.

This system of assessment does not include an individual's total remuneration package (including, for example, superannuation and fringe benefits), thereby effectively allowing individuals to reduce their taxable income and, increasing their eligibility for a range of benefits by shifting sizeable portions of their total package into superannuation and fringe benefits.

For example, it is possible that a family with a combined income (i.e. salary and fringe benefits) well in excess of $100,000 or $150,000 can apply for and receive Family Allowance under the present system.

We believe this system to be inequitable and badly targeted.

Eligibility for Family Allowance and AUSTUDY, under a Coalition government, will therefore be based on a family's combined total income remuneration and not on taxable income. We believe that by including all remuneration income, a better judgement can be made on the extent to which a family is deserving of government assistance.

11.8 FAMILY CRISIS CARE

The Coalition's commitment to increase funding of voluntary/non-government agencies by $50 million will be to the advantage many families currently suffering from the effects of financial and social hardship.

18 2 Chapter 11

One of the most important features of the work performed by voluntary agencies

is family care and family crisis counselling, Part of the additional $50 million which the Coalition will provide to voluntary agencies will allow them to further enhance their role in this vital area.

11.9 EMPLOYMENT

The most important benefit government can provide for families is opportunity for employment which brings financial security and self respect.

Under the Coalition's high growth economic strategy, itis independently estimated that unemployment will fall to 5.2 per cent by the Year 2000 and the number of jobs created will rise by nearly two million (see Supplementary Paper No I on Employment Growth).

11.10 TAXATION

Comprehensive reform of the taxation system will substantially lessen the amount of tax paid by working families, improving take-home pay, offering the incentive to work harder to earn more and by raising the capacity of families to save for the future .

Under our taxation reform package, personal income tax will be cut by $13 billion, more than 320,000 Australians who currently pay tax will no longer have to do so and 95 per cent of taxpayers will face a marginal rate of 30 cents in the dollar or less.

We will also clamp down on tax avoidance by high income earners who escape their obligations at the cost of average Australian families.

11.11 PETROL

Family running costs will be lowered by the Coalition's commitment to completely abolish petroleum excise, saving motorists about 19 cents a litre or around $11.40 every time they fill the tank of the family car.

11.12 FIRST HOME OWNERS SCHEME

Families earning up to $40,000 and saving to buy their first home will be eligible for a one-off payment of $2,000 to offset the effects of the Goods and Services Tax on their savings.

Chapter 11 1S3

11.13 HEALTH

Low income families in particular will benefit from measures contained in the Coalition's health policy.

Families earning between $20,000 and $30,000 per year will be eligible for a tax credit of $200 per family to help meet total annual private health insurance costs. Low income families on incomes between $12,000 and $20,000, often the greatest users of medical services, will be eligible for tax credit of $300 per year if they

choose to take out private health insurance, and very low income families with incomes below $12,000 will be eligible for a credit of $400 per family.

Health services will be zero-rated with no liability for the Goods and Services Tax. The cost of health services can be expected to fall.

For further details see Supplementary Paper No 3.

11.14 EDUCATION

The Coalition's education policy will be of great benefit to Australian families. Parents will have a much greater role to play in the education of their children. The Coalition's emphasis will be on funding the individual rather than the institution. Such an approach will return quality and excellence to the education system, further strengthening the family unit. Specific initiatives include:

significant increases in recurrent funding for non-government schools;

• doubling capital funding for non-government schools to $162 million;

• increasing funding for TAFE by over $450 million over a six year period;

a range of other programs including "Schools of Choice" to promote best teaching practice, "Quality of Teaching" programs, literacy and language programs, national monitoring of standards and a special program for gifted children.

In addition, education fees will be zero rated for the Goods and Services Tax. The cost of education services is expected to fall.

For further details see Supplementary Paper No 4.

184 Chapter 11

11.15 SUPERANNUATION AND SAVINGS

The Coalition's generous tax rebates for contributions to a superannuation fund will provide great incentive for all families to plan for their retirement while providing additional security to the family unit. The abolition of the lump sum tax will also provide older family members with a significant financial boost as they

approach their retirement years.

As a major initiative to assist women in particular, the Coalition will ,allow spouses to make tax rebatable contributions in respect of themselves and their partner. Such contributions will be immediately vested and preserved in the name of the beneficiary. The maximum rebatable amount will be $1,500 a year in respect of a maximum annual contribution of $6,000. The maximum rebatable

contribution that can be made by a married couple will be $12,000 per annum,

We intend to provide incentives for shorter term savings through a new Tax Free Savings (TFS) scheme whereby interest on all new savings up to a limit of $2,000 per annum for married couples and $1,000 per annum for single taxpayers will attract a rebate of 30 cents in the dollar, whatever their income.

This means that at current interest rates over four million married couples with children who have taxable incomes of $50,000 or less will pay no tax on the interest income for the first $25,000 of new net savings.

11.16 SUPERANNUATION FOR HOUSING

The Coalition will allow young Australians under 35 buying their first home to withdraw up to 75 per cent of their accumulated savings to put against the purchase of a house, this amount to be repaid to the superannuation fund over the remainder of their working lives.

185

Chapter 11

12. ASSISTANCE TO AGED PENSIONERS, RETIREES

AND LOW INCOME EARNERS

In designing our tax reform package it was one of the top priorities of the Coalition to ensure that Australia's aged would be appropriately and properly compensated. Where possible we also wanted to provide additional assistance in their retirement.

The Coalition believes that Australia's aged are a special group. They have worked hard for their country, fought for it in two world wars and in retirement they deserve as much assistance as possible to help them live in security and with dignity.

We believe the assistance measures outlined below will achieve this.

12.1 KEY DECISIONS

In June 1991, Australia's total aged population was 2.3 million.

Of those, 1.4 million were receiving age pensions or part-pensions from the Government. 408,000 service pensions were paid to veterans. The remaining 500,000 were self-supporting, either living off superannuation income or offier forms of saving.

The Coalition believes that pensioners, particularly those on age and service pensions and self-funded retirees are deserving of special attention. Many are persons who are running down their financial assets, such as funds in bank accounts, fixed annuities and so on, to finance their consumption in retirement. Acknowledging that the introduction of the Goods and Services Tax will have a

once-off inflationary effect, we have devised special compensation measures for this group.

General measures under the Coalition's tax reform package will include:

all taxpaying retirees to receive substantial income tax cuts;

an increase in the tax free threshold from $5,400 to $7,000;

access to the new Tax Free Savings (TFS) Scheme - under the TFS, retirees and pensioners (like all Australians) will be able to earn up to $2,000 (family) or $1,000 (single) in interest income from new savings tax free;

Chapter 12 187

under our changes to the capital gains tax, retirees and pensioners will not

be taxed on gains of $3,000 or less per year; sale of goodwill will get tax relief; the sale of a business by retirees aged 60 or more will be tax free up to a value ten times 'average annual earnings (currently amounting to around $300,000); and similar exemptions will apply to a business, proceeds of which are placed in an Approved Deposit Fund until retirement;

retirees and pensioners will benefit from the significant fall in the price of petrol that will result from our decision to abolish excise on petroleum products;

they will also benefit from our decision to end age discrimination and compulsory retirement.

More specific measures to compensate and assist age and service pensioners and retirees include:

direct increases in age and service pensions by eight per cent to over 28 per cent of average weekly earnings - an increase of $24.10 in pension per fortnight;

a GST Tax Credit - ensuring that all part pensioners earning some additional income will be fully compensated;

• direct compensation for over-60s for the Goods and Services Tax effect on savings - retirees with taxable income up to $30,000 per annum will be compensated for any one-off decrease in the value of their savings;

• tax credits for private health insurance of up to $400 per single pensioner receiving less than $12,000 per year; and $800 per low income pensioner couple receiving less than $14,500 per year - this effectively will cover the full cost of private health insurance which will allow access to a private bed in a private or public hospital and doctor of choice;

• access to pharmaceutical benefits for non-pension retirees - up to 500,000 aged Australians will save up to $250 per year on pharmaceutical expenses;

a deferred pension plan - pension increase for those who defer their pension and remain in the workforce, e.g. a two year deferment will result in a 16 per cent increase in pensions;

• simpler reporting arrangements - further encouragement for pensioners to earn additional income;

reform of the assets test - pensioners in genuine need, particularly those in rural areas, will not be unfairly treated under the pension income and assets test.

188 Chapter 12

12.2 COMPENSATING AGED AND SERVICE PENSIONERS FOR THE

INCOME EFFECT OF THE GOODS AND SERVICES TAX

As explained in Chapter 10, age and service and other pensions will be increased by eight per cent on the introduction of the Goods and Services Tax.

The tables on the following pages show compensation adjustments for single and married pensioners, both with and without dependent children.

The tables also cover the compensation paid to full and part-pensioners. Full pensioners are compensated solely through increases in the pension while part pensioners receive partial compensation through increases in the part pension, through taxation cuts and through the GST Tax Credit.

The age and service pensions have been adjusted by eight per cent - 3.6 per cent higher than the forecast price impact of the Goods and Services Tax.

That rate will give pensioners a deserved bonus from taxation reform and allow for a generous margin of overcompensation to cover possible differences in consumption patterns and the fact that many pensioners may be running down savings by consuming more than they earn.

Meanwhile, the tax-free threshold and the rate of clawback of the pension paid to part-pensioners has been escalated by 6 per cent - the same rate as used to adjust other benefit levels.

The resulting pension payments for age and service pensions will be:

TABLE 12.1

Current After GST

Single* $301.60 pf $325.70 pf

Married* $503.00 pf

($251.50 ea)

$543.20 pf ($271.60 ea)

Excludes the non-taxable Pharmaceutical Allowance which will be increased by 6 per cent,

Pensioners and beneficiaries with children, including sole parents, currently receive non-taxable guardians' and childrens' allowances. Their non-taxable allowances and payments will be increased by six per cent.

Chart 12.2 "Income Compensation" shows how full pensioners receive an eight per cent increase while the rate of compensation for part pensioners varies with the amount of non-pension income received.

Chapter 12 1 89

I

NCREASE IN INCOME

10 10

3

8

4

7

0

3

6

4

2

0

CHART 12.2

I NCOME COMPENSATION FOR A SINGLE PENSIONER

0 50 100 150 200 250 300 350 400 450 500 550 600 650 NON PENSION INCOME PER FORTNIGHT

rULl, PENSIONER = PART PENSIONER

12.3 GST TAX CREDIT

The need for a GST Tax Credit arises where full compensation cannot be provided through the present taxation and income support mechanisms. The GST Tax Credit will apply to low income earners with taxable incomes below the post-GST tax free threshold of $7,000 and part-pensioners and beneficiaries who cannot be fully compensated either through the tax or social security systems.

One of the major faults of the 1985 Draft White Paper on Reform of the Australion Tax System was that it failed to recognise the need for compensation for over 850,000 low income earners whose initial tax liabilities were simply too small to be fully compensated through existing measures. In 1985 these included 195,000

pensioners, 70,000 juniors and at least 160,000 married women who were going to be deliberately ignored by Labor. Rather than ignoring them the Coalition has devised a completely new system of compensation to assist this group.

190 Chapter 12

12.3.1 Low Income Earners

For those with taxable incomes up to their pre-GST tax free threshold, the GST Credit will be equal to 4.8 per cent of their taxable income. The amount of GST Credit will fall as taxable income rises above the pre-GST tax free threshold of $5,400 until it cuts out when taxable income reaches the post-GST tax free

threshold of $7,000. The GST Tax Credit will protect the real value of the incomes of low income earners who do not benefit at all or only receive partial compensation from the increase in the tax free threshold.

For example, for a single taxpayer with a taxable income of $5,400 a GST Tax Credit of $259 would be paid ($5,400 x 0.048).

The amount of the GST Tax Credit will fall as taxable income rises above the pre-GST tax free threshold until it is zero when taxable income reaches the post-GST tax-free threshold ($7,000 for a single taxpayer).

The advantage of the GST Tax Credit approach is that preservation of its real value in subsequent years would require only that the maximum value of the GST Tax Credit and the pre-GST and post-GST tax thresholds be indexed. The administrative burden on low income earners and the Australian Tax Office would

be relatively light. Low income earners would be required to complete a GST 'lax Credit claim form, which would be included with the Tax Pack mailed to every household in Australia and available from Post Offices. The form would simply require a statement of income and evidence of having received such income, for

example, a group certificate.

It is estimated that 2.3 million low income earners not receiving a basic pension or benefit would be eligible for GST Tax Credits, GST Tax Credits to those not in receipt of a basic pension or benefit would be paid quarterly by the Australian Taxation Office.

12.3.2 Pensioners and Beneficiaries

Those whose non-pension or non-benefit income is too low to be taxed and therefore do not receive the benefits of income tax reductions will also be compensated by the GST Tax Credit.

Put another way, these people are fully compensated in regard to their part pension income but since their non-pension income is not taxed, it is not possible to compensate that portion of their total income through tax cuts.

It is important to recognise that this is a fault of the present system. These same part-pensioners are not compensated for policy actions by the present Government which affect the cost of living, including, for example, the extensive increases over recent years in wholesale sales tax and other tax imposts.

Chapter 12 19 1

The GST Tax Credit will be in addition to compensation in the form of pension

and benefit increases and will serve a similar purpose to the GST Tax Credit for those on low incomes and not on a government pension or benefit.

In both cases, the GST Tax Credit provides compensation to those on low incomes who do not benefit at all or who only benefit partially from the formula adjustment to the income tax system.

The GST Tax Credit will, in effect, make up the difference between the compensated part pension or benefit and the total amount required to fully compensate a part pensioner or beneficiary for the price impact of the Goods and Services Tax.

For example, as shown in Table 12.3, a part pensioner earning $120 non-pension income per fortnight will receive a 7.7 per cent increase in his or her total income under the Coalition's Tax Reform Package.

This amounts to an extra $30.40 per fortnight which is made up partly through an increase in the pension of $22.70 and partly through a GST Tax Credit.

Chart 12.4 "Elements of Compensation "which follows Table 12.3, demonstrates in a simple way how the GST Tax Credit works for single pensioners on varying taxable income levels. Table 12.5 illustrates the effect for married pensioners.

GST Tax Credits to pensioners and beneficiaries will be paid automatically by the Department of Social Security as a separately identified increment to pensions and benefits. The amount of the credit will be calculated by the Department using information already supplied to it by pensioners and beneficiaries. Because

pensioners. already inform the Department of the level of their non-pension income, pensioners/beneficiaries will not have to fill in a GST Tax Credit form. Also, payment will be made automatically through the existing delivery system in

fortnightly instalments, avoiding potential difficulties in budgeting by pensioners that may occur if payment were made in quarterly instalments.

The GST Tax Credit will also be available to those under 60 years of age who can demonstrate that they neither receive a government pension nor earn enough income to receive a large enough tax cut to adequately compensate them for the one-off CPI effect of the Goods and Services Tax.

These people will be eligible for a GST Tax Credit equal to 7.25 per cent of income up to $20,000. That is, they are eligible for a maximum credit of $1,450. There are 411,000 people who will be eligible for this special GST Tax Credit.

This measure will cost $85.9 million.

192 Chapter 12

TABLE 12.3

SINGLE PENSIONER • No Children ("^ (rounded to nearest 10 cents)

Non-Pension Income

$ Pf

Pension

Up $pf

After Tax Non-Pension Income

Rebate

Labor $Pf

GST Credit

Lib/NP $pf

Total Aflor Tax Income Increa c

Labor $pf

Lib/NP $pf

Labor $pf

Lib/NP $pf

Labor $pf

I,ib:N'P $pf

Up $pf

0 301.6 325.7 24.1 •18.9 -9.3 18.9 9.3 301.6 325.7 24 1 R 1) 1!

84 301.6 325.7 24.1 48.3 61.1 35.7 28.7 385.6 4113 5 21) 9 ; .g

100 293.6 317.1 23.5 62.7 75.9 34.7 28.1 '391.1) 421.1 30.1

120 283.6 306.3 22.7 80.7 94.4 33.4 27.5 397.8 125.2 30.4

140 273.6 295.5 21.9 98.7 112.9 32.2 26.8 404.5 435.2 30.7 7.6

160 263.6 284.7 21.1 116.7 131.5 30.9 26.1 411.3 412.2 31.0 7 .5 f^

180 253.6 273.9 20.3 134.7 150.0 29.7 25.4 418.0 449.3 31.3 75 «

200 243.6 263.1 19.5 152.7 168.5 28.4 24.7 424.8 45(1.3 31.5 7.1

250 218.6 236.1 17.5 197.7 214.7 25.3 22.9 441.6 47:37 32.1 7.3

300 193.6 209.1 15.5 242.7 261.0 22.2 21.1 458.5 491.2 I 32.7 7.1 '!

350 168.6 182.1 13.5 287.7 307.3 19.1 19.2 475.4 508.6 33.2 7.0

400 143.6 155.1 11.5 332.7 353.6 15.9 17.2 492.3 525 .9 33.6 6.8

450 118.6 128.1 9.5 377.7 399.8 12.8 15.3 509.1 543.2 34.1 6 .7

500 93.6 101.1 7.5 422.7 446.1 9.7 13.2 526.0 5(1(1.4 34.4 6.5

550 68.6 74.1 5.5 467.7 492.4 6.6 11.1 542.9 577.6 34.7 6.4

600 43.6 47.1 3.5 512.7 538.7 3.4 9.0 5 59.8 594.8 35.0 6.a

650 18.6 20.1 1.5 557.7 584.9 0.3 6.8 576,6 611.8 35.2 (3,1

690 0.0 0.0 0.0 593.4 621.7 0.0 0.0 593.4 62 1.7 28.3 4 .8

Excludes the non-taxable Pharmaceutical Allowance which will be increased by 6 per cent.

Chapter 12 193

75%

50%

253,.

CHART 12.4

ELEMENTS OF COMPENSA TION FOR A SINGLE PENSIONER ELEMENTS OF COMPENSATION 1 00%

\\^Y .,.,\

'lilt \\^ \ \\^ \\ ^^\!111Ij,l I I I^ ;; I ' 1 IE ;I;tf ^ j I(I , i 100%

75%

50>

25%

0% ^- --t- - ^-- ,- -

1 1 0%

0 50 100 150 200 250 300 350 400 450 500 550 600 650 NON PENSION INCOME PER FPRTNICIIT

r_» TAX EFFECT 1__.; PENSION EFFECT ;^1` C=ST C1 E?D1T

194 Chapter 12

TABLE

12.5

MARRIEr? PENSIONER - No Children (°' (rounded to nearest 10 cents)

After Tax :'oral i Non-Pension Non-Pension Rebate GST After Tax Income Pension Income Credit iuewe 1;;.r;;,,c>Labor Lib/NP Labor LibINP Up Labor Lib/NP Labor LibINP (':p $pf $pf $pf $pf $pf $pf $pf $pf $ f w ,r w. (^ ^i i 3^f0 251.5 271.6 20.1 -8.9 -0.5 8.9 0.5 251 5 271 +; i 20 1 i 5.084 246.5 266.2 19.7 59.3 70.8 23.1 17.2 :3225 9 3:, ;.2 1 .I100 238.5 257.6 19.1 73.7 85.6 22.1 1(i.7 334 :1 I :i:59!i as ii `'. ,120 228.5 246.8 18.3 91.7 104.1 20.8 115.0 341.0 300.9 25.9 ? '.c3140 218.5 236.0 17,5 109.7 122.6 19.6 15.3 34 7.; I i73.a 261 7 160 208.5 225.2 16.7 127.7 141.1 18.3 14. 6 354.5 3S.9 26.4 7.4180 198.5 214.4 15.9 145.7 159.6 17-1 13.9 361.: 5 :5579 2(36 74200 188.5 203.6 15.1 163.7 178.1 15.8 13.2 365.0 1 30-1.90 - 6.) ,:3250 163.5 176.6 13.1 208.7 224.4 12.7 11.4 354.9 4924 275 ! 7300 138.5 149.6 11.1 253.7 270.7 9.6 9.5 401 S 429.7 25.0 j 70350 113.5 122.6 9.1 298.7 316.9 6.4 7 .5 447 ,7 ; 254 i;.,400 88.5 95.6 7.1 343.7 363.2 3.3 5.5 43; 3 454.:; 255 o ii i>450 63.5 68.6 5.1 388.7 409.5 0.2500 38.5 41.6 3.1 433.7 455.8 0.0 4.5 4722--j i i u1., 29.6 62550 13.5 14.6 1.1 478.7 502.0 0.0 5.6 492.2 522.2 30.0 6-' !,600 0.0 0.0 0.0 521.4 546.3 0.0 G.4 521.4-+I 55 2. 3 1.:3 5333* Excludes the non-taxable Pharmaceutical Allowance which will be increased by ii per cent. Chapter 12 195

12.4 COMPENSATING AGE PENSIONERS AND RETIREES FOR THE

WEALTH EFFECT OF THE GOODS AND SERVICES TAX ON THEIR SAVINGS

In the 1985 Draft White Paper on Reform of the Australian Tax System the Government arrogantly 'dismissed the issue of wealth compensation.

"Overall there may be a modest fall in the real value of private wealth holding ... To the extent that any detriment is correlated with the size of net wealth holdings, it may be inversely related to the need of the asset-holder. A partial exception may be social security recipients such as elderly retired persons who are running down modest private resources to finance their

consumption in retirement. Many of these (ie. those having significant private income), however, may receive compensation through both the taxation and social security systems. The Government considers that it would not be practicable, even if it were desirable, to compensate

systematically for the pattern of changes in the value of private wealth holdings. "

The Coalition does not agree with these conclusions and we believe that the Labor Government's inability to adequately address the question of wealth compensation for older members of the community was one of the reasons why Prime Minister Hawke and Treasurer Keating failed in their attempt to introduce a consumption

tax in 1985.

The argument for compensating for the adverse wealth effect of the package is strongest for older members of the community who have retired from the workforce, and in many cases are living on personal savings.

Aged persons have built up their wealth by saving and prudent investment after paying income tax during their working lives. They did this in the expectation of being able to run-down their savings to support themselves in their retirement years. There is a strong case on equity grounds for protecting the purchasing

power of aged persons' savings since they would otherwise be taxed twice - once when they paid relatively high personal income tax rates on earning their income and again when they pay GST as they consume their savings.

The Coalition has therefore decided to introduce specific measures to compensate the elderly for the impact of the Goods and Services Tax on their wealth.

12.4.1 Direct Wealth Compensation

Australians 60 and over with annual incomes up to $30,000 will have the opportunity to make a claim for compensation for the one-off reduction in the purchasing power of their accumulated financial wealth caused by the introduction of the Goods and Services Tax.

196 Chapter 12

Compensation will be paid at a rate of five per cent (ie. slightly higher than the

estimated average CPI effect of the 15 per cent GST of 4.7 per cent - or 4.4 per cent excluding tobacco). The cost of compensation will be sensitive to the assumed average interest and compensation rates. A lower interest rate implies a larger stock of wealth, and vice versa.

Wealth compensation arrangements will comprise a "phasing out" for wealth compensation over the taxable income range from $20,000 to $30,000. At $20,000, full wealth compensation will be paid, subject to a cap of $2,500 per person and will be phased out completely at $30,000.

The value of the GST wealth rebate to eligible taxpayers will be calculated by the Australian Taxation Office, based on individual circumstances.

The Australian Taxation Office could proceed as follows:

(a) determine age eligibility and income eligibility from the taxpayer's 1993-94 tax return (lodged early in 1994/95);

(b) for eligible taxpayers, impute their eligible wealth stock from their interest income from the 1992/93 tax returns based on an assumed average interest rate (the interest rate average compiled for the Tax Free Savings Scheme purposes could be used for this purpose);

(c) remit a refundable tax credit equal to 5 per cent of (b) - or a lesser amount if a rebate cap applies - to eligible taxpayers as part of the Australian Taxation Office's assessment for 1993-94 (payments being made over the middle months of 1994-95).

The wealth rebate is intended to maintain the real value of the stock of wealth at the time of introduction of the GST policy. Therefore it is expected that recipients will retain the rebate as savings because to do otherwise would be a change in behaviour. Therefore the wealth compensation package is both equitable and also macroeconomically sound.

The following example illustrates how wealth compensation will be paid and delivered.

A person 65 or over has declared interest income of $1,000 per year.

Assuming a deemed rate of interest of say, eight per cent this will mean that the imputed stock of wealth will be $12,500.

Assuming wealth compensation will be paid at five per cent, a slightly higher rate than that needed to compensate for the 4.4 per cent CPI effect, this will mean that wealth compensation of $625 will be due.

The Coalition will introduce a number of other measures specifically designed to assist pensioners and retirees in their retirement.

Chapter 12 197

12.5 FURTHER MEASURES TO ASSIST PENSIONERS AND RETIREES

12.5.1 Extension Of Pharmaceutical Benefits Concession (PBC) Card To Retirees

To further assist retirees who are living off their own financial resources, the next Coalition Government will extend the Pharmaceutical Benefits Concession Card (PBCC) to all people aged 65 and over who are currently not receiving any government concessions and whose income is less than $40,000 (single) per year

and $50,000 (married) per year.

A single non-pensioner currently pays $315 for an average 26 prescriptions each per year. Using a PBCC, this person will pay only $65 per year, a saving of $250. Married non-pensioners currently pay $175 each for their average 26 prescriptions each per year. Access to the PBCC will save them $110 each per year. The cost

of this proposal is $110 million.

12.5.2 Health Care

Pensioners and retirees will significantly gain under the Coalition's proposed health policy changes.

Medicare will be retained but significantly improved.

Bulk billing will remain available to all pensioners and health care card holders.

Tax credits for private health insurance of up to $400 per single pensioner receiving less than $12,000 per year and $800 per low income pensioner couple receiving less than $14,500 per year will be made available. This effectivel y will cover the full cost of basic private health insurance which will allow access to a private bed in a private or public hospital and allow a doctor of choice.

With access to a private hospital bed and a doctor of their choice, for many pensioners and retirees, the days of waiting in public hospital queues will be over.

12.5.3 Deferred Pension Plan

Australians, on average, are living longer and healthier lives. Many are able and willing to work beyond the age of retirement. Consequently, compulsory retirement is a waste of valuable human resources and reduces individual self-fulfilment.

1 98 Chapter 12

Age alone

should not be a bar to employment and we will legislate to remove this artificial barrier to enable employees or self-employed persons to continue to work if they so desire. Under these circumstances, a person who wishes to remain in the workforce beyond age 65 and who qualifies for the age pension at the time and agrees to defer it, will receive a pension bonus for each additional year of

deferment.

For example, a 65 year old male pensioner who deferred his pension for two years would receive a pension increase of 16 per cent in the fortnightly pension.

The Deferred Pension Plan will be available to:

all persons eligible for full or part pension over the current retirement age, who either remain in the workforce or who wish to live on their superannuation or other income beyond that age;

existing pensioners, e.g. widows, who wish to return to the workforce, defer their pension and receive the pension bonus on final retirement.

12.5.4 Simplified Reporting Arrangements

Currently pensioners are required to notify the Department of Social Security within 14 days of any variation to their income above the income test limits of'S42 for a single person and $74 for a married couple.

This causes unnecessary concern to many pensioners who receive a variable income and acts as a disincentive for them to maximise income from their investments or part-time work.

We will simplify pension reporting arrangements as follows:

single and married pensioners will be able to receive additional non-pension income above current income test limits ($42 single, $74 married) without having to report within the mandatory 14 day period. At the end of each

six months they will be requ i red to lodge a statement of income at which time an appropriate adjustment, up or down, to the pension will be made to coincide with CPI adjustments.

12.5.5 Reforming the Assets Test

The Coalition will implement a more equitable assets test for the age pension to ensure that aged Australians, particularly those living in rural communities, will not be treated unfairly.

The assets test will be administered to ensure that persons in genuine need are not precluded from the age pension, particularly those who live on farms.

Chapter 12 1 99

In particular, the assets test will not apply to retirees who:

wish to retire on or from the family farm when they intend passing it on to their close relations who are already working on the farm and drawing their primary income from it;

are unable to sell their property due to market conditions;

remain on relatively small or non-viable land holdings on which they cannot generate income beyond the age pension limits; or

are unable to subdivide and sell their land due to government restrictions.

We will ensure that all reasonable cases of hardship are fully considered in determining eligibility for the age pension. For example, following the death of a spouse, when the combined married rate of pension would cease after three months, and there is demonstrated hardship, (e.g. funeral expenses), we would extend the payment of the married pension rate to up to six months.

The income and assets test limits applying to age pensions will be reviewed on a regular basis to ensure that pensioners are encouraged to earn additional income to supplement their pension without losing benefits.

References

Reform of the Australian Tax System, Draft White Paper, June 1985

200 Chapter 12

13. ASSISTANCE TO NON-AGE PENSIONERS AND WELFARE BENEFICIARIES

In keeping with the Coalition's commitment to compensate for the Goods and Services Tax, a wide range of social security pensions, benefits and allowances will be increased.

All pensions, including sole parent, disability support, wives, war widows, widows, and carer's pensions will all be increased by eight per cent. While the Coalition has decided to tighten up eligibility for such pensions as sole parent, disability support and carers' we believe the genuinely needy in these categories deserve to receive the same level of compensation as those on the age and service pension.

All other benefits and allowances, including:

unemployment, sickness and special benefits;

education study allowances; and

a large array of training allowances, including those paid under the community development and employment program to the aboriginal community

will be increased by six per cent.

Table 13.1 is an illustration of how the six per cent increase applies to the Job Search Allowance (single, over 21, not at home).

Table 13.2 entitled "Commonwealth Income Support Payments" show the pension and benefit adjustments which would apply if our tax reform package was introduced now.

For example, under the Goods and Services Tax a sole parent pensioner will receive an additional $12.05 per week.

An unemployed person over age 21 with no dependents will receive an additional $8.35 per week in benefit.

When the Goods and Services Tax is introduced in 1994, the amounts shown in these tables will be larger, reflecting the effect of indexation over time.

Chapter 13 201

TABLE 13.1

JOB SEARCH ALLOWANCE - SINGLE, NO CHILDREN (rounded to nearest 10 cents)

Non . Pension

Income

$pf

Pension

Up $pf

After Tax Non-Pension Income

Rebate

Labor $pf

GST Credit

Lib/NP $pf

Total After Tax Income Increases

Labor $pf

Lib/NP $pf

Labor $pf

Lib/NP $pf

Labor $pf

Lib/NP $pf

Up $pf %

0 277,7 294.4 16.7 -14.1 -4.2 14.1 4.2 277.7 294.4 16.7 6.0

50 277.7 294.4 16.7 25.9 37.7 7.9 0.0 311.5 332.1 20.6 6.6

60 277.7 294.4 16.7 33.9 46.1 0.4 0.0 312.0 340.5 28.5 9.1

100 257.7 273.2 15.6 69.9 83.0 0.0 0.0 327.6 356.2 28.6 8.7

120 247.7 262.6 14.9 87.9 101.5 0.0 0.0 335.6 364.1 28.5 8.5

140 237.7 252.0 14.3 105.9 120.0 0.0 0.0 343.6 372.0 28.4 8.3

160 217.7 230.8 13.1 125.9 140.2 0.0 0.0 343.6 371.0 27.4 8.0 t

180 197.7 209.6 11.9 145.9 160.4 0.0 0.0 343.6 369.9 26.4 7.7

200 177.7 188.4 10.7 165.9 180.6 0.0 0.0 343.6 M8.9 25.4 7,41

250 127.7 135.4 7.7 215.9 231.1 0.0 0.0 343.6 366.4 22.8 6.6 !I

300 77.7 82.4 4.7 265.9 281.6 0.0 0,3 343.6 364.2 20.6 0.0

350 27.7 29.4 1.7 315.9 332.0 0.0 2.8 343.6 364.2 20.6 6.0

202 Chapter 13

TABLE 13.2

COMMONWEALTH INCOME SUPPORT PAYMENTS

Current $

Amount Indexation Tax GST Increase 13icrcasc

$ pa(a) Status Status Conip Per 'Neck Per Annum

EDUCATION

AUSTUDY Payments 16-17 standard/at home 3235 Yes Yes Yes $3.73 194.48

16 . 17 away/independent 5339 Yes Yes Yes 6.18 321.18

18 and over standard/at home 3887 Yes Yes Yes 4.49 234.10

away/independent 5905 Yes Yes Yes 6.80 354.55

married with child 6341 Yes Yes Yes 7.32 281 06

Married with dependant spouse 12246 Yes Yes Yes 14 i3 72r; 73

Special - standard/home 4609 Yes Yes Yes 5.32 277.38

Special - away/independent 7003 Yes Yes Yes 8.08 41 21 29

Special - sole parent 8330 Yes Yes Yes 9.61 501.06

SOCIAL SECURITY & WELFARE

* Age Pension single 7842 Yes Yes Yes 12.05 (89c) 628.28

married 6539 each Yes Yes Yes 10.05 (each) 524.00

;31

* W r Jife's Pension

single 7842 Yes Yes Yes 12.05 (328.28

* Carer's Pension 7842 Yes Yes Yes 12.05 ()2b.28

* Disability Support Pension 7842 Yes No Yes 12.05 028.28

Sheltered Employment Allowance (abol. Nov) 7842 Yes No Yes 9.05 471.86

Rehabilitation Allowance 7842 Yes No Yes 9.05 471.86

Mobility Allowance 572 No No Yes 0116 34.41

Unemployment Bone (it

Job Search Allowance (JSA) - Single max 3227 Yes Yes Yes 3.?2 193.96

min 1505 Yes Yes Yes 1.74 90.7.2

independent 5325 Yes Yes Yes 6.14 323).13

Newstart Allowance - Single 18-20 3877 Yes Yes Yes

4.47 233.06

(at hometno dependants) 18. 20 5889 Yes Yes Yes

6.80 354.515

(not at home/no dependants)

203

Chapter 13

Current

$ $

Amount Indexation Tax GST Increase Increase

$ pa(a) Status Status Comp Per Week Per Annum

21 + 7220 Yes

(no dependants/not home) 60 + 7842 Yes

(no dependants)

Sickness Benefit Single 18-20 3877 Yes

(at home/no dependants) 18-20 5889 Yes

(not at home/no dependants) 21 + 7220 Yes

(no dependants) 60 + 7842 Yes

(after 6 months)

- Married both over 21 13078 Yes

(with children combined) either under 21 (without children each) for partner 21 + 6539 Yes

for partner 18 . 20 5889 Yes

for partner under 18 5325 Yes

Family Allowance (over $40.000) First three children 1560 Yes

Four children 2254 Yes

Five children 2948 Yes

Add for extra child 694 Yes

Family Allowance Supplement Child under 13 (per child) 1378 Yes

Child 13-15 (per child) 2010 Yes

Child over 15 (per child) 884 Yes

* Sole Parent Pension 7842 Yes

Child Disability Allowance 1557 Yes

Double Orphan's Pension 835 Yes

Special Benefit UB Rates Yes

* Class B Widow's Pension 7842 Yes

* Widowed Pensions Allowance 7842 Yes

Additional Payouts

Rent Assistance No children 1612 Yes

1/2 children 1882 Yes

3+ 2150 Yes

Remote Area Allowance

Yes Yes 8.33 434.32

Yes Yes 9.05 47186

Yes Yes 4.47 233.06

Yes Yes 6.80 354.55

Yes Yes 8.33 434.32

Yes Yes 9.05 471.86

Yes Yes 15.09 286.79

Yes Yes 7.55 :19:1,65

Yes Yes 6.80 :354.55

Yes Yes 6.14 320.13

No Yes 1.80 9:3 85

No Yes 2.60 135.56

No Yes 3.40 177.27

No Yes 0.8{) 41.71

No Yes 1.59 82.90

No Yes 2.32 12096

No Yes 1.02 53.18

Yes Yes 12.05 628.28

No Yes 1.80 93.85

No Yes 0.96 50.05

Yes Yes

Yes Yes 12.05 628.28

Yes Yes 12.05 (528.28

No Yes 1.86 96.98

No Yes 2.17 113.14

No Yes 2.48 129.30

204 Chapter 13

Current

$ $

Amount Indexation Tax GST Increase Increase

$ pa(a) Status Status Comp Per Week Per Annum

Single 364 No Yes Yes 21.84

Married 312 No Yes Yes 18.72

+ each child 182 No Yes Yes 10.92

Guardian Allowance 723 Yes No Yes 0.83 43.27

Young Homeless Allowance 5325 Yes Yes Yes 6.1.1 320.13

(away)

Multiple Births Payments Triplets 2085 Yes No Yes 2.41 125 65

Quads 2785 Yes No Yes 3.21 167.36

Telephone rental concessions 49 No No Yes 2.94

Pharmaceutical allowance 135 Yes No Yes 0.15 7.82

* Pharmaceutical allowance paid into benefit

VETERANS' AFFAIRS

Service Pension 7842 Yes Yes Yes 12.05 628.28

(as for Aged Pension)

* Pharm Allowance

Disability Pension Special rate 14407 Yes No Yes 22.16 1155.42

Intermediate rate 9924 Yes No Yes 15.27 796.17

General rate 5434 Yes No Yes 8.36 435.89

* War Defence Widow 8466 Yes No Yes 13.02 678.86

Wife Service Pen - married 6539 Yes No Yes 10.06 524 52

War orphan - one parent 1339 Yes No Yes 2.06 107.40

War orphan - two parents 2678 Yes No Yes 4.12 214.81

Decorations Allowance Clothing Allowance 187(max) Yes No Yes 11.22

86(min) Yes No Yes 5.16

Attendant Allowance Payable to a veteran who as a result of service has :

Two arms amputated 4384 Yes No Yes 5.06 263.82

Been blinded and also affected with total loss of speech or total deafness 4389 Yes No Yes 5.06 263.82

Two legs and one arm amputated 2192 Yes No Yes 2.53 131.91

Two legs amputated either at the hip or one at the hip and the other in the upper third 2192 Yes No Yes 2.53

131.91

Chapter 13

205

Current

Amount $ pa(a)

Indexation Status

Tax Status

GST Comp

$

Increase Per Week

$

Increase Per Annum

Been blinded 2192 Yes No Yes

2.57 134.00

Recreational Transport Allowance Higher rate 1165 Yes No Yes 1.34 69.86

Lower rate 582 Yes No Yes 0.67 34.93

Decoration Allowance 52 Yes No Yes 0.06 3.12

Vehicle Assistance 780 No No Yes 46.80

Funeral Assistance 550 No No Yes 33.00

Temporary Incapacity Allowance 14407 Yes No Yes 16.62 S66.56

Extreme Disabled Adjustment 8151 Yes No Yes 9.41 490.53

Telephone Rental Assistance 49 No Yes Yes 2.94

Loss of Earnings Allowance 14407 Yes No Yes 16.52 6ti.56

Travel and Accommodation Assistance (Reimbursed) Accommodation Allowance 51 pm No No Yes

Meal Allowance Breakfast 6.50 pm No No Yes 0.39 20.33

Lunch 6.50 No No Yes 0.39 2033 .

Dinner 15.50 No No Yes 0.93 48.49

Guardians Assistance 723 No No Yes 43.38

Children's Allowance Under 13 1391 Yes No Yes 1.61 83.94

13 . 15 2010 Yes No Yes 2.32 120.96

Over 16 884 Yes No Yes 1.02 53.18

Remote Area Allowance Single Veteran 364 Yes No Yes 0.42 21,89

Married Couple 312 Yes No Yes 0.36 18.77

Children 182 Yes No Yes 0.21 10.194

Education Allowances Secondary Under 16 years (at home) 520 Yes No Yes 0.60 31.28

16-17 years (at home) 3227 Yes No Yes 3.72 193.96

18 and over (at home) 3877 Yes No Yes 4.47 233.06

Under 16 years (away) 3227 Yes No Yes 3.72 193.96

16-17 years (away) 5325 Yes No Yes 6.14 320.13

18 and over (away) 5889 Yes No Yes 6.80 :354.55

Under 16 years (independent) 5325 Yes No Yes 6.14 320.13

16-17 years (independent) 5325 Yes No Yes 6.14 320.13

18 and over (independent) 5889 Yes No Yes 6.80 354.55

206 Chapter 13

Current

$

Amount Indexation Tax GST Increase Increase

$ pa(a) Status Status Comp Per Week Per Annum

Tertiary 16-17 years (at home) 3227 Yes No Yes 3.72 193.96

18 and over (at home) 387? Yes No Yes 4.47 233.06

16-17 years (away) 5325 Yes No Yes 6.14 320.13

18 and over (away) 5889 Yes No Yes 6.8() 354 55

16. 17 years (independent) 5889 Yes No Yes 6.69 :151 55

18 and over (independent) 5889 Yes No Yes 6.80 354.53

Double Orphans 3227 Yes No Yes 3.72 193.96

Under 16 (independent) 5889 Yes No Yes 6.8(1 354.55

16-19 years (independent) 5889 Yes No Yes 6.80 354.55

20 and over (independent) 6984 Yes No Yes 8.05 420.24

EMPLOYMENT AND TRAINING

Individuals in receipt of unemployment benefits or sole parent pensions while undertaking a training

scheme or a CDEP will receive appropriate compensation under the GST

OTHER BENEFITS AND ALLOWANCES

Off-the-Job Training Fee (only for Group Schemes) wage rebate * 2000 No No Yes 120.00

• course cost * 2000 No Na Yes 120.00

* maximum payment - 65 days

Living Away From Home Fee • I year 2034 No Yes Yes 2.35 122.52

2 year 866 No Yes Yes 1.00 52 14

Fares Assistance No Yes Yes

(public transport to the value of economy class surface transport)

Apprentice Training Incentive commencement grant 1500 No Yes Yes 90.00

• completion grant 1500 No Yes Yes 90.00

Re-establishment grant for new employer 1000 No Yes Yes 60.00

Formal Training Allowance No Yes Yes

(same as Newstart and Jobsearch allowance)

ABSTUDY

Under 16 years Student - away/independent 3235 Yes No Yes

$ 3.72 193.96

207

Chapter 13

Current

Amount $ pa(a)

Indexation Status

Tax Status

GST Comp

$

Increase Per Week

$

Increase Per Annum

16 • 17 years Student - at home 3235 Yes Yes Yes 3.72

193.96

Student - away/independent 5339 Yes Yes Yes 6.16 321.18

18 - 20 years Student - at home 3887 Yes Yes Yes 4.49 234.10

Student - away 5905 Yes Yes Yes 6.81 355.07

ABSTUDY - TERTIARY

Under 16 years Student - at home 521 Yes No Yes 0.60 31.28

Student - away/independent 3235 Yes No Yes 3.11 162.15

16 - 17 years Student • at home 3235 Yes Yes Yes 3.72 193.96

Student - away/independent 5339 Yes Yes Yes 6.16 321.18

Single student with dependants 8330 Yes Yes Yes 9.61 501.06

Married students with dependants 6341 Yes Yes Yes 7.32 381.66

18.20 years Student - at home 3887 Yes Yes Yes 4.49 234.10

Student - away/independent 5905 Yes Yes Yes 6.81 355.07

Single student with dependants 8330 Yes Yes Yes 9.61 501.06

Married students with dependants 6341 Yes Yes Yes 7.32 381.66

21 - 24 years A B A 13

Student-at home 6174 4609 Yes Yes Yes 7.12 (371.23) 5.12 (277.38)

Student - away/independent 8567 7002 Yes Yes Yes 9.89 (515.06) 8.08 t42129)

Single student with dependants 9894 8330 Yes Yes Yes 11.42 (591.43) 9.61(501.06)

Married students with dependants 7905 6341 Yes Yes Yes 9.12 (4"5.31) 7.32 (381J36i

25 + years Students 8567 7003 Yes Yes Yes 9.89 (515.66) 8.08 (42129)

Single - away/independent 8804 7240 Yes Yes Yes 10.16 (529.:1? 6.35 ;435$6)

Single student with dependants 9894 8330 Yes Yes Yes 11.42 (595.43) 9.61(501.06)

Married students with dependants 7905 6341 Yes Yes Yes 9.12 (475.51) 7.32 (381.00)

208 Chapter 13

14. GENUINE ASSISTANCE FOR THE UNEMPLOYED

14.1 INTRODUCTION

Employment is not just a means of earning a living. It is frequently the means through which people express their creativity and aspirations. It is the source of much social contact and personal development. In many cases it is the key to lifelong good health and family cohesion.

Unemployment does not only cause poverty. Long term unemployment destroys personal aspirations, saps individual self-worth, perpetuates poverty and creates long term welfare dependence.

The Coalition is determined to restore full unemployment as a practical and realistic goal. We will arrest the growth of long term unemployment and provide the most effective assistance to help the unemployed back into paid employment.

Only steady and sustainable economic growth can ensure full employment and rising living standards.

Labour market programs are intended to reduce the economic and human waste associated with unemployment. Unfortunately a number of the Government's current programs are poorly targeted and do little to provide active employment assistance. The Coalition will not follow Labor's passive approach to managing employment but will instead pursue a genuine active employment strategy.

The Coalition will adopt a completely new approach to the administration of unemployment benefits and training programs for the unemployed. Our program will demand commitment from the unemployed and participation by community organisations. It will also provide a steady flow of job opportunities for the unemployed under a new training wage program.

14.2 KEY DECISIONS

The Coalition will:

increase social security payments, to the unemployed by six per cent;

progressively tighten the administration of the Job Search Allowance and end automatic entitlement after nine months;

offer the unemployed earlier access to programs which combine employment and training;

Chapter 14 209

integrate labour market training programs into mainstream training

courses;

expand the training role of TAFE and provide an additional $520 million to support growth in TAFE over the rest of the decade;

offer a range of positive workplace alternatives for those genuinely unemployed after nine months;

create a steady flow of employment opportunities for the longer term unemployed by introducing AUSTRAIN - a special program which will allow the unemployed to be hired at training wages which reflect the duration of their unemployment;

devolve responsibility for administering employment and training programs from government agencies to local community boards with government representation;

establish a more flexible and community based employment strategy through the establishment of Local Employment Boards which will comprise local DSS officials, State or local government training representatives and community and business sector representatives;

integrate the administration of payments and training functions by merging the Commonwealth Employment Service (CES) with the Department of Social Security (DSS) to create a much more efficient and effective one-stop shop for unemployed persons;

contract out employment placement functions and services currently provided by the CES;

provide a significant increase in the funds available to voluntary community based organisations and community based programs such as Skillshare; and

allow people to opt to work for the benefit after nine months.

The innovative and results-oriented program contrasts with the present inadequate and badly targeted administration of unemployment benefits and labour market programs.

14.3 UNEMPLOYMENT BENEFITS UNDER LABOR

The Government's Job Search and Newstart Allowance Programs for the unemployed remain fundamentally passive programs. Labor has been content to leave people on the dole - to the detriment of both the unemployed and the community.

210 Chapter 14

During the one year period of the Job Search Allowance (JSA), the work test is

woefully inadequate and poorly administered, as confirmed in a recent Auditor-General's report "Administration of the Work Test for Unemployment Benefits". According to the Report:

Measures introduced in 1989 and 1990 had not all been successful in meeting the objectives and budgetary savings set for them..

Staff in the CES network continue to hold the view that work I activity testing is not compatible with the primary job placement role of the CES.

The initiatives adopted by DSS in 1990 to interview in greater numbers shorter and medium duration beneficiaries, and to make better use of related information and services from the CES network, although soundly designed, were not well implemented. This implies

that related increases in staffing were not used effectively for the purpose provided."

The Commonwealth Employment Service (CES) requires beneficiaries to nominate only two employees "approached" in the previous fortnight - usually names taken from newspapers or CES Boards - and does not in practice involve any regional office follow up. This was highlighted in the Auditor-General's Report which

stated:

"Work testing often was considered onerous by CES staff"

At the one year mark, under Labor, beneficiaries enter into a Newstart Activity Agreement which, in theory, is supposed to be a "contract" by which more active job search is required of the beneficiary to ensure continued receipt of income support.

However, because the success of the Newstart program is closely linked to the performance of the CES, the program is inherently flawed.

The passive approach to job placement which is adopted by the CES ensures that many Newstart beneficiaries will themselves continue to adopt an equally passive approach to job search. With minimal intervention by the CES and inadequate "follow up", many Newstart beneficiaries can continue to provide the obligatory

two employer names per fortnight and still be considered genuine in their desire to find work.

Chapter 14 2 11

14.4 TRAINING PROGRAMS UNDER LABOR

Lengthening dole queues have seen Labor continue to cast around for solutions by adding to the plethora of existing job training and education programs.

The March 12 Industry Statement (reaffirmed in the Budget) increased total expenditure on training programs by 50 per cent, bringing total expenditure to over $500 million pa.

Labor's approach to training programs is ad hoc and piecemeal. Under Labor, labour market programs have never been fully integrated with micro or macroeconomic policy. They have evolved therefore more in response to political pressures from time to time about "doing something about the unemployed" rather

than as real initiatives to implement genuine labour market programs.

Treasurer John Kerin's recent admission that unemployment will stay around the nine per cent mark for the next few years is an admission of failure. It concedes that training programs, for many of the unemployed, will not lead to any real job opportunities.

For example, Jobtrain, the biggest of the Government's labour market programs, with a budget of $160 million in 1991-92, will assist only one in five participants to find a job.

Jobtrain's failures were highlighted in a recent Auditor-General's report which identified 50 separate instances where the program needed improvement to correct "major shortcomings". Despite the requirement that entrants to Jobtrain be unemployed for at least six of the last nine months, the Auditor-General found

that over half the scheme's participants had not been unemployed for six months.

Such poor targeting is common among DEET training programs. DEET often tends to select participants most likely to give their programs the appearance of success, rather than those most in need of assistance.

According to the latest DEET Program Monitoring Report, those programs which offer on-the-job training with an employer (Jobstart, Australian Traineeship System) are by far the most successful. However, the long term unemployed, those who need the most assistance, gain the least from programs specifically designed to help them, such as Jobtrain.

Attachment A taken from the March 1991 DEET Monitoring Report, clearly highlights the shortcomings of many of Labor's training programs in placing people in jobs.

212 Chapter 14

14.5 A MORE PROGRESSIVE APPROACH TO TRAINING PROGRAMS

The Coalition will give more positive encouragement, through more flexible, innovative and community based training programs, for the unemployed to get back into the workplace.

This approach will be integrated with the Coalition's broader program of microeconomic reform including a more flexible wages system and an industrial relations policy based on genuine workplace bargaining.

The Coalition's community based employment training approach will be bolstered by our commitment to upgrading the role of the voluntary/non-government sector in the delivery of services which extends to training programs for the unemployed.

As a consequence, Skillshare type training programs, which encourage strong community based/non-government sector involvement will form a key part of the Coalition's approach to training.

The Coalition's community based training approach will allow schemes to be designed to meet specific community and localised needs while offering a more extensive community support network for the unemployed.

The aims of such an approach are:

to provide relevant training programs designed and conducted in a partnership between government, the community and the private sector, co-ordinated by Local Employment Board representatives;

• to redirect resources away from passive income support to more active labour market strategies;

• to assist the long term unemployed and disadvantaged in the community to attain a recognised labour market qualification;

to allow increased responsibility for the non-government/community based agencies in the development, administration and delivery of vocational training;

• to ensure that all training is directed towards the objective of achieving employment,

The Coalition's more flexible and community based employment strategy will be achieved through the establishment of Local Employment Boards. These will:

• comprise local departmental officials, State or local government training representatives and community and business sector representatives

Chapter 14 213

decide the allocation of funds between the various alternative programs,

including Skillshare, Job Search Assistance, a reformed JOBTRAIN (providing longer term training) Job Skills and Special Intervention programs to provide basic literacy, numeracy and presentational skills.

be allocated funds according to regional characteristics, the number of unemployed persons in the area as well as other matters such as qualifications, skill levels, employer demand and cost of training.

14.6 ADMINISTRATION OF INCOME SUPPORT FOR THE UNEMPLOYED

The Coalition will introduce a far more rigorous administration of income support programs for the unemployed.

The Coalition's approach to unemployment benefits will ensure that payments go only to those actively looking for work.

During periods of receipt of unemployment payments the onus will be on the individual to actively look for employment in order to continue to qualify for support. The work test will be progressively tightened during the nine month JSA period.

We will continue and enforce the existing arrangements for extended ineligibility period penalty for those who have voluntarily resigned.

The timetable for access to various unemployment and training assistance will be as follows:

14.7 THE FIRST THREE MONTHS

In order to qualify for income support through the JSA the principal emphasis should be on the individual providing evidence that he/she is actively looking for employment.

Recipients will be screened on registration to ensure they have the basic literacy, numeracy and language competencies needed for employment. Those who have not will be given remedial assistance.

During the initial three month period, the Coalition will maintain the current requirements of the work test whereby beneficiaries must provide the names of at least two prospective employers approached in the previous two weeks.

The onus will be on the individual to actively look for work rather than rely on job placement assistance from the DSS or CES, as is currently often the case.

214 Chapter 14

The specially disadvantaged will have access to a range of training and labour

market programs during this period. This group includes Aborigines, migrants with English language difficulties, sole supporting parents and homeless youth.

14.8 THE SECOND THREE MONTHS

At the three month mark, beneficiaries will be required to attend interviews and counselling to ensure awareness of:

the availability of a wide range of education and training programs and other labour market options, some of which will become available at three months with others available after six months; and

the fact that JSA will terminate after nine months.

During this period, the initial work test will be maintained and random checks will be carried out with named prospective employers in order to ensure full compliance with the work test.

14.9 THE FINAL THREE MONTHS

During this period, a more rigorous work test will be applied. Instead of the mandatory two employer names per fortnight, six names will be required, at least two of whom must have been approached in person and have signed a certificate to that effect. Unemployed persons will be expected to examine options to travel and to relocate in order to gain employment. More intensive random checks will

also be carried out.

At the same time beneficiaries will become eligible to participate in the AUSTRAIN program.

Beneficiaries will also be entitled to apply to Local Employment Boards for participation in training programs,

Attachment 2 is an illustrative case study of an unemployed person under Coalition policy.

14.10 FAILURE TO SATISFY TEST

At any time during the nine month period, where a beneficiary does not satisfy the work test or has failed to co-operate in a training program, JSA will be withdrawn. During the three to nine month period, it is estimated that 40,000 beneficiaries will have their benefit discontinued. However, there will be a right of appeal

available to the Social Security Appeals Tribunal.

Chapter 14 215

14.11 AT THE NINE MONTH MARK

The JSA payment will cease. It is estimated that at this point 50,000 recipients will no longer be eligible for income support. A thorough review of the JSA recipient's work test history will be conducted in order to determine eligibility for any further government assistance. Job seekers, who have participated in training

programs when offered and who have met the requirements of the more rigorous work test but who still remain unemployed, will have the following options:

14.11.1 AUSTRAIN

Those out of work for at least six months and who have been in receipt of a social security payment during that period will be eligible to participate in on the job training through the AUSTRAIN program.

This scheme allows participants to be employed at training wage rates, The rates would vary, depending upon the time out of work.

This will ensure that the long term unemployed are given real opportunity to gain on-the-job training to enable them to re-enter the workforce.

After six months' unemployment an employer will be able to offer a job at 90 per cent of the award wage or other equivalent minimum and after 12 months unemployment at 80 per cent.

To ensure against poverty traps, employers would not be able to pay a training wage which was less than the rate of benefit which the AUSTRAIN participant had received previously.

Employers would be required to move to full award minimum or voluntary enterprise wage levels within a specified time. Those starting on 90 per cent would move to 100 per cent within 12 months and those starting at 80 per cent within 18 months.

A contract outlining the rate and conditions of employment would be prepared by the Local Employment Board.

The Austrain approach, by requiring the trainee to accept lower training wages while training is in progress, reduces the burden of the cost of training which is borne by the employer.

14.11.2 Work-For -Benefit

Those coming off the JSA will be eligible to participate in a Work-for-Benefit program.

216 Chapter 14

Subject to approval of a Local Employment Board, and in accordance with

specified guidelines and appropriate monitoring arrangements, participants may be permitted to enter into a Work-For-Benefit arrangement with a community based/voluntary organisation, or non-government organisation for a maximum of six months.

The Work-For-Benefit program may also involve regional or rural-based private sector employers, subject to agreement with the Local Employment Board that full-time workers are not displaced by Work-For-Benefit participants. Under such arrangements, Work-For-Benefit will generally be for a maximum period of six

months.

Work-For-Benefit participants will need to locate a willing employer with whom they could work for 2 days per week. Subject to further approval by the Local Employment Board, participants may be able to enter into an additional

Work-For-Benefit Program at the end of the six month period.

For the remainder of each week participants will be required actively to seek regular work. Failure to do so could lead to displacement from the Work-for-Benefit program.

Work-for-Benefit programs would be required to offer relevant employment experience designed to improve prospects for employment.

Those over 55 years of age working in voluntary agencies, or participating in community service activities could obtain approval from a Local Employment Board to work with the one employer indefinitely.

Following the completion of a work-for-benefit program, participants will be still eligible for AUSTRATN training programs and in cases of hardship, special benefit.

14.11.3 Special Benefit

At nine months, an application for Special Benefit will be considered and the previous work test record assessed. If a person is found to be in a situation of hardship and has been actively looking for work throughout the period, such a person will be eligible to receive Special Benefit on condition that he or she continues to satisfy on-going hardship criteria adheres to the same tighter work test which applies in the final three months of Job Search Allowance.

Current guidelines for special benefit would apply so that participants would not be required to dispose of a home, a car or tools of trade but would be expected to reduce liquid assets to specified levels existing at the time.

Special beneficiaries will continue to have access to approved community based training programs.

Chapter 14 217

Existing arrangements applying to the payment of Special Benefits to Aborigines

living in remote communities will continue.

14.12 DSS AND CES

The "shop front, over the counter" functions of the Department of Social Security and the Department of Employment, Education and Training (Commonwealth Employment Service) (CES) will be amalgamated. Most of the job placement activities of the CES will be privatised or contracted out.

218 Chapter 14

ATTACHMENT I

POST PROGRAM LABOUR MARKET AND EDUCATION STATUS BY PROGRAM PERCENTAGE OUTCOMES IN 12 MONTHS TO MARCH 1991 (1)

Labour Market Status Prop.in Prop. with ^f

further positive

Program ed/train- outcomes ^4

Empl Unemp NILE' Total Freq ing (`i) I,E

(2) t,3)

Australian 81.2 13.4 5.4 100.0 6,584 14.5 848

Trainee System (I

Employment 36.9 54.2 8.9 100.0 60,416 12.6 ; 47.0

Access Program

JOBTRAIN 26.3 62.4 11.3 .100.0 36,083 15.0 39.4

JOBSTART 57.9 36.5 5.6 100.0 10,325 7.0 61.8

Job Clubs 42.9 50.9 6.2 100.0 9,018 14.9 53.6

Job Search - Training ,

Courses 21.1 69.5 9.4 100.0 4,990 13.0

f

32.8

Training for 46.6 43.7 9.7 100.0 6,504 9.5

^

52.8

Aboriginals program

Skillshare Other 33.8 53.5 12.7 100.0 42,033 15.7 i 46.4

Programs (5)

64.6 26.8 8.5 100.0 2,087 18.3 75.8

TOTAL 39.1 5 0. 9 10.0 100.0 117,624 13.7 49.5

(1) Program cessations in the 12 months ending December 1990 (2) Not in the Labour Force (3) Includes those in employment. Those only in training/education is equal to "positive" outcomes less those employed.

(4) Includes those in employment and training/education (both full and part-time) and those receiving further DEET program assistance

Chapter 14 219

ATTACHMENT 2

CASE STUDY FOR THE UNEMPLOYED UNDER COALITION POLICY

Jim: Unemployed, age 33. Previously employed as a nursing home attendant until recently retrenched

Jim applies for Job Search Allowance and waits three weeks before receiving his first payment of Job Search Allowance.

For the first three months of Job Search Allowance, Jim will be expected to exercise his own initiative in looking for work. The basic work test will apply to Jim to ensure ongoing eligibility for the Job Search Allowance. This will require Jim to submit the name of two employers contacted in the previous fortnight to

demonstrate he is genuinely looking for work.

If Jim is still on Job Search Allowance after three months, he will receive counselling by the DSS. A DSS departmental officer will advise him of the range of training and labour market programs run by the Local Employment Boards in his area and the fact that in six months time Job Search Allowance will cease.

Throughout the three to six month period, Jim will be required to continue to satisfy the work test but the CES will begin to initiate random checks with employers to ensure there has been genuine compliance with the work test.

Jim will also be eligible for various training and labour market programs run by his Local Employment Board, Many of these will be regionally based training programs designed to meet the special needs of unemployed persons like Jim.

During the six to nine month period, Jim will be required to contact six employers per fortnight, with two of those having been approached in person to ensure ongoing eligibility for Job Search Allowance. More intensive random checks will also be conducted by the CES to ensure people like Jim remain genuine in their job search.

In this period of his unemployment the DSS will also require Jim to show cause why he cannot relocate or travel to secure possible employment. Declining to do so and/or failure to meet the requirements of the work test will mean that Jim will lose his entitlement.

Jim will also have access to further training or TAFE courses as recommended by his Local Employment Board. The Austrain program will also become available to him.

22 0 chapter 14

At the end of nine months, if Jim is still unemployed, his Job Search Allowance

will be terminated.

At this point, Jim will have the following options available to him through his Local Employment Board:

an opportunity to participate in an AUSTRAIN program;

the chance to work-for-the-benefit;

Special Benefit, which will only be available if Jim can prove hardships and an inability to participate in either work-for-benefit or an AUSTRAIN program.

If Jim decides to participate in an AUSTRAIN program, because he has been receiving Job Search Allowance for nine months, he will receive a "training wage" from his employer equal to 90 per cent of the award wage. Jim and his employer will enter into a contract stipulating certain conditions, two of which will require

that the training wage must not be less than the Job Search Allowance and, if Jim is retained by the employer after twelve months, then the full award wage must be paid.

If Jim decides to Work-for-Benefit, he will be able to so do, with the agreement of his Local Employment Board, for a period of six months. Work-for-Benefit programs can be offered by the non-government, community based, or voluntary sector, and in some cases by regionally based private sector employers. While Jim is working-for-his-benefit for a maximum of two days per week, he will also be

required to continue to look for full time, permanent employment. Failure to do so could mean Jim being displaced from the program.

If at the end of six months, Jim wishes to continue to work-for-benefit, he may do so only with the approval of his Local Employment Board. Otherwise, Jim will be able to apply for participation in an AUSTRAIN program or Special Benefit,

subject to training and work test requirements.

If unable to participate in either AUSTRAIN or Work for Benefit Programs, due to their unavailability in his region or they are considered inappropriate, Jim will be eligible to apply for Special Benefit and his work test record assessed. If Jim is found to be in a situation of genuine hardship, he will be eligible to receive

Special Benefit subject to satisfying on-going hardship criteria and a tighter work test. While on Special Benefit, Jim will be required to participate in training programs when offered. Failure to meet the above criteria will mean cancellation of benefit,

Chapter I4

221

15. ASSISTANCE TO FIRST HOME BUYERS

15.1 KEY DECISIONS

The Coalition has for many years encouraged home ownership and in designing the Goods and Services Tax has made special provision to safeguard the capacity of Australians to purchase their first home.

The Coalition therefore considers assistance should be available to first home buyers to take account of the net impact of the Goods and Services Tax reforms on a home whilst recognising that our taxation reforms will increase their financial capacity to service a home mortgage. Assistance of $2,000 will be

provided to first home buyers of both new and established dwellings where household income does not exceed $40,000 pa.

In addition, in a new initiative, the Coalition's superannuation policy will allow contributors to superannuation to withdraw funds to assist in financing home purchases as detailed in the Coalition's superannuation policy,

15.2 THE GOODS AND SERVICES TAX IMPACT ON RESIDENTIAL HOUSING

There will be no Goods and Services Tax imposed on the sale price of existing homes although the agent's commission, which is a service, will be taxed. However with the price of new homes increasing, it is expected a corresponding increase will flow through to existing homes. In the case of new housing, the

Goods and Services Tax will not apply to the final price. Instead, building materials and products used in residential construction, land development, home improvements and repairs and maintenance will be input taxed.

The builder's margin and the contract labour element which together comprise around 50 per cent of the actual home cost (excluding the land element) will not be subject to Goods and Services Tax, Based on the input taxing approach and according to estimates provided by the Housing Industry Association (HIA), an average home of $120,000 would increase by $2,856 i.e. two to three per cent. This is the net Goods and Services Tax impact after discounting for the abolition

of wholesale sales tax and petrol tax but not including the benefits of abolishing payroll tax.

Chapter 15 223

While this increase is not insignificant, it needs to be seen in its proper context

when considering the proposed compensation arrangements. For example the increase would most probably be financed by a larger mortgage, the cost of which would be amortised over a number of years. Furthermore, borrowings taken out

for a home purchase would be serviced with a higher after tax income, as a result of the substantial tax cuts offered by the Coalition.

In the case of an average wage earner on $30,000 per annum, the Coalition's economic package provides a tax cut of $1,585 per annum giving a monthly benefit of around $130. If it is assumed that the same wage earner purchases a home which carries the average Goods and Services Tax impact of $2,856 it would cost only $29 a month in additional interest to finance this increase (assuming an interest rate of 12 per cent). Clearly in this situation a one-off payment of $2,000

more than compensates for the added impact of the Goods and Services Tax on the newly purchased home.

The home price increase of two to three per cent and thus higher mortgage servicing costs are more than matched by the increase in disposable income of at least 4.8 per cent.

Beyond this, it may be argued that some compensation is required for the Goods and Services Tax impact to mitigate the impact of CPI increases on the new home buyer's savings.

15.3 DETAILS OF THE FIRST HOME OWNERS SCHEME

The Coalition will provide an amount of $2,000 to first home buyers under the First Home Owners' Scheme (FHOS) which will be available to purchase both new and established dwellings. The FHOS will be made as a direct payment to first home owners earning up to $40,000 per annum household income.

For the purposes of administrative simplicity, no formal demonstration of a prior savings record will be required to receive the FHOS payment.

FHOS will ensure low to middle income Australians who have been saving to buy their first home will not find their capacity to buy a home suddenly eroded by the introduction of the Goods and Services Tax. Those on higher incomes will be compensated by large personal income tax cuts and other assistance such as

targeted Family Allowance Payments.

The FHOS has been costed at $175 million in the first full year of operation.

224 Chapter 15

15.4 CALCULATING THE GOODS AND SERVICES TAX IMPACT ON

A NEW HOME

The HIA have provided information which specifically details the Goods and Services Tax impact on an average newly constructed home.

In the case of an average home the net Goods and Services Tax impact is $2856 after discounting the effect of abolishing wholesale sales tax and petrol tax.

The impact of Goods and Services Tax was evaluated for an average new dwelling is set out in Table 15.1.

TABLE 15.1

GSA' IMPACT ON AVERAGE NEW DWELLING

1 Total Price $120,000

House $84,000

Land $36,000

2 Present WST and petrol tax impact

House WST and petrol tax of $3,771 ^f

Land WST and petrol tax of $ 771 Total WST and petrol tax on average home of $4,482 or 3.735 per cent of $120,000 ??

To estimate the impact of Goods and Services Tax it is assumed that Goods and Services Tax would apply to purchases of building materials and products included in land servicing, new home construction, home improvements and repairs and maintenance. The builder's or developer's margin and payment for on-site labour services under contract would not be subject to Goods and Services Tax.

It is estimated that indirect taxes fall wholly on materials. The following table sets down the pre-wholesale sales tax and petrol tax material costs in land and dwelling to which Goods and Services Tax was applied. The estimated materials content of $6,489 in land would translate to a Goods and Services Tax of $973 on the basis of a 15 per cent rate of Goods and Services Tax.

After allowing for 15 per cent Goods and Services Tax on materials in the dwelling, the total impact of Goods and Services Tax on housing costs would be $7,338, compared with a current indirect tax contribution of $4,482. The net impact of a 15 per cent Goods and Services Tax would therefore be $2,856 as shown in Table 15.2.

Chapter 15 225

TABLE 15.2

MATERIAL COSTS ($)

LAND DWELLING TOTAL

Materials less indirect tax

7,200 711

46,200 3,771

53,400 4,482

pre-GST 6,489 42,429 48,918

Rate of Goods and Services Tax

Contribution of GST ($)

15 per cent 973 6,364 7,338

Additional Cost Impac t of Gst ($)

262 2,594 2,856

15.5 CALCULATING THE GOODS AND SERVICES TAX IMPACT ON AN ESTABLISHED HOME

The impact of a Goods and Services Tax applied to building materials used in constructing a new dwelling will result in a price increase, and it is expected that an increase of similar dimension will flow through to established dwellings.

This will result in a gain to established home owners were they to realise their asset. No gain is achieved if the asset is not realised or proceeds from a sale were spent on goods not previously taxed.

15.6 ACCESS TO SUPERANNUATION FUNDS BY FIRST HOME BUYERS

To encourage young people to take out superannuation, funds will be permitted to allow those under the age of 35 to have access to up to 75 per cent of their accu mulated vested superannuation benefit for the purpose of a deposit or part deposit for a home. This will be required to be repaid over a term of 25 years and will be secured against the home. Where the balance of the purchase monies have been borrowed, and secured by first mortgage, the superannuation fund can be secured by a second mortgage.

Upon permanent retirement or genuine resignation, the person's entitlement would be reduced by any amount outstanding. This amount will be considered part of the lump sum limit.

This measure will help to remove the present conflict between saving to achieve home ownership and saving for retirement. Fund trustees will be able to require borrowers to take out mortgage insurance.

226 Chapter 15

16. EXPENDITURE SAVINGS

The next Liberal-National Government will implement an integrated package of fundamental reforms to rebuild Australia and reward Australians.

A central objective of our reform program is to improve the performance of government and its contribution to national well-being.

The thrust of the Liberal-National Government's economic policy is to increase the ability of individuals and families to provide for themselves and to ensure that businesses operate in the best possible environment to maximise efficiency and competitiveness. The Coalition's program will make this possible, while clearly

ensuring that the genuinely needy are adequately provided for.

The current size of government imposes an onerous burden on, and costly intervention in, the lives of individuals, families and businesses.

The size and cost of government are excessive. Both will be reduced.

These decisions will be accompanied by significant reductions in the overall level of taxation, reductions of tax on business to create jobs and in particular reductions of personal income tax. They will enable people to retain more of what they earn. This will, in turn, improve individual freedom of choice and reduce people's need to rely on government.

In all areas of government there is a requirement to target programs more effectively, deliver programs and services more efficiently, and reduce or abolish programs that are no longer cost-effective or appropriate.

The Coalition will ensure that welfare and other payments are properly targeted to those genuinely in need of such support.

Over many years, governments have increasingly and inappropriately involved themselves in the provision of goods and services that are more efficiently provided by the private sector. Public sector activities are often shielded from competition. Individual firms in a competitive private sector have no option but to minimise their costs and maximise efficiency if they are to prosper. This means they must be innovative and responsive to changing demands.

The users of many services currently supplied by government would benefit considerably if these services were delivered by the private sector. The contracting out of such services will provide a better definition, and will enable more direct targeting, of the service provided. It will also enable the level of, and need for,

community service obligations to be accurately assessed and be more cost efficient.

Chapter 16 227

For example, research indicates that at least 20 per cent can be saved in the cost

of delivering services if they, are contracted out.

Many of the services currently provided by the public sector can be corporatised, privatised or contracted out with significant cost and efficiency savings to government and hence the taxpayer. We will place a high priority on implementing a full program to achieve this outcome.

EXPENDITURE DECISIONS

The Liberal and National Parties will make substantial savings across a wide range of portfolios as shown in Tables 16.1 and 16.2. Given the worst recession in sixty years, fiscal restraint is imperative and, in combination with a major overhaul of revenue and expenditure priorities, every area of government outlays must be scrutinised. Savings will be achieved by:

better targeting of programs to those who need them;

- greater efficiency in the way programs are managed and in the way services, benefits and assistance are delivered;

- reducing or eliminating programs where there is duplication of other services or where provision of benefits or services by government is no longer appropriate; and

- greater cost recovery by charging for commercial services and encouraging private sector funding of some programs

The Coalition's expenditure proposals will result in gross savings of $10.0 billion (in 1991/92 dollar terms). However, our spending initiatives and GST compensation measures will increase outlays by $6.0 billion, resulting in net expenditure savings of $4.0 billion or 4 per cent of projected 1991-92 Budget

outlays.

The expenditure reductions have been estimated on the basis of the total of additional net savings made in each of the three years. For example, expenditure savings in the housing portfolio in the first year are $100 m; in the second year they are an additional $250 m; and in the third year, an additional $50 m, providing a total saving, as indicated, of $400 m. They are set out in detail on a

portfolio basis in Table 16.2. The 1991-92 Budget outlays figures under each portfolio heading are exclusive of corporate and support services (which are included under "Departmental Efficiency Savings" Section 16.2), unless otherwise specified.

Unless otherwise noted, the expenditure reductions listed under each portfolio will be implemented in the first year and remain in subsequent years. All GST

228 chapter 16

compensation measures will take effect from the introduction of the GST, as

explained elsewhere in this document, See Chapter 18 for more details on the timetable for reform.

The Coalition's proposal for the States to abolish Payroll Tax will require the Commonwealth Government to make equivalent recompense to the States. The impact of this proposal on the Budget is also discussed in Chapter 18.

At all times the Coalition has erred on the side of caution in calculating the expenditure savings.

For example, we have not included any savings from the Waterfront Industry Reform Authority's payments to redundant waterfront workers, even though we could achieve substantial reductions from the projected outlays. As well, we have included as savings only the 1991-92 outlays of $56 million under the Government's Building Better Cities program, even though outlays on this program will rise to hundreds of millions of dollars before we are in Government

and we would terminate the program forthwith.

(Similar caution has been taken in calculating revenues. In particular, no account at all has been taken of the additional revenues that will accrue from higher employment and increased business activity resulting from the Coalition's policies.)

The Coalition's proposed expenditure reductions will result in a lower public service staffing requirement. Much of this reduction in personnel will be met through natural attrition. Where programs are eliminated, or reduced substantially, however, redundancies may be necessary. A sum of $200 million has been set aside for this task. However, it is anticipated that, in many cases, redundancy funding will be met from within Departmental budgets.

The expenditure savings are based on the Government's 1991-92 Budget outlays, converted to 1990-91 dollars using the Government's forecast 1991-92 non-farm GDP deflator of 3 per cent. This conversion has been made to ensure consistency with the Coalition's taxation proposals which have been calculated on the basis of

1990-91 figures, the last year for which final actual revenue figures are available. In the case of the diesel fuel rebate scheme the actual 1990-91 expenditure figure is used.

Gross expenditure savings over the three years are $9.7 billion in 1990-91 dollar terms. Net expenditure savings, after allowing for new spending initiatives, are $3.9 billion in 1990-91 dollar terms.

The expenditure savings have been produced and presented using the Government's Budgetary treatment of outlays.

Chapter 16 229

TABLE 16.1: SUMMARY OF THREE YEAR EXPENDITURE PROGRAM

Increases Decreases Net Savings in Outlays in Outlays

PORTFOLIO

General Savings (Political) 0 47 47

Departmental Efficiency Saving 0 249 249

Aboriginal Affairs 0 90 90

Administrative Services 0 220 220

Arts, Heritage and Sport 0 60 60

Attorney-General and Justice 0 52 52

Communications 2 76 74

Community Services and Aged Care 0 0 0

Corporate Law and Consumer Affairs 3 13 10

Defence 300 500 200

Education 413 173 - 240

Employment and Training 35 300 265

Energy and Resources 0 440 440

Environment 0 10 10

Family Assistance 1060 0 -1060

Finance 0 6 6

Foreign Affairs 0 209 209

Health 698 1509 811

Housing 180 400 220

Immigration and Ethnic Affairs 0 21 21

Industrial Relations 0 79 79

Industry and Commerce 0 53 53

Land Transport 0 87 87

Primary Industry 0 497 497

Prime Minister and Cabinet 0 34 34

Privatisation (Public Debt Interest) 0 1328 1328

Science and Technology 0 20 20

Social Security 2643 2415 -228

Tourism and Aviation 0 23 23

Trade 0 70 70

Treasury 475 787 312

Veterans' Affairs 0 8 8

SUB TOTAL 5809 9776 3967

Redundancy Allowance 200 0 - 200

Telecom Debt Repayment 0 275 275

NET TOTAL 6009 10051 4042

Note: Table 16.2 which follows outlines the details of expenditure increases/decreases on a year by year basis. It also explains the derivation of the figures set out above.

230 Chapter 16

TABLE 16.2: EXPENDITURE SAVINGS BY YEAR

Expenditure Increases/Decreases $m

PORTFOLIO Year 1 Year 2 Year 3'Ibtal

(2)

Inc Dec Inc Dec Inc Dec Net

General Savings (Political) 0 47 - - - - 47

Departmental Efficiency Saving 0 128 - 121 - - 249

Aboriginal Affairs 0 82 - 8 - - 90

Administrative Services 0 100 - 120 - - 220

Arts, Heritage & Sport 0 60 - - - - 60

Attorney-General & Justice 0 41 - 11 - - 52

Communications 2 76 - - - - 74

Community Services & Aged Care 0 0 - - - - 0

Corporate Law & Consumer Affairs 2 13 1 - - - 10

Defence 100 150 200 350 - - 200

Education 244 159 84 14 85 - -240

Employment & Training 35 101 - 199 - - 265

Energy & Resources 0 15 - 319 - 106 440

Environment 0 7 - 3 - - 10

Family Assistance 0 0 795 0 265 - -1060

Finance 0 6 - - - - 6

Foreign Affairs 0 154 - 55 - 209

Health 20 0 678 1509 - - 811

Housing 0 100 135 250 45 50 220

Immigration & Ethnic Affairs 0 21 - - - - 21

Industrial Relations 0 42 - 37 - - 79

Industry & Commerce 0 53 - - - - 53

Land Transport 0 87 - - - - 87

Primary Industry 0 15 - 363 - 119 497

Prime Minister & Cabinet 0 0 - 34 - - 34

Chapter 16 231

Expenditure Increases/Decreases

$M

PORTFOLIO Year 1 Year 2 Year 3Total

(2)

Inc Dec Inc Dec Inc Dec Net

Privatisation (Public 0 297 - 519 - 512 1328

Debt Interest) Science & Technology 0 20 - - - - 20

Social Security 128 1109 1887 1117 628 189 -228

Tourism & Aviation 0 23 - - - - 23

Trade 0 35 - 35 - - 70

Treasury (& Payments to Other Governments) 10 787 349 - 116 - 312

Veterans' Affairs 0 8 - - - - 8

TOTAL 541 3736 4129 5064 1139 976 3967

Allowance for Redundancies 150 0 50 - - - -200

Telecom Debt Repayment 0 275 - - - - 275

-----

NET TOTAL SAVINGS 691 ----- .---_

4011 4179

__--- _ --

5064 1139

-----

976

------

4042

TOTAL

Increases = $ 6,009 m

Decreases = $10,051 m

NET $ 4,042 m

NET TOTAL SAVINGS IN 1991-92 DOLLARS: $4042 m

NET TOTAL SAVINGS IN 1990-91 DOLLARS (1) $3868 m

232 Chapter 16

Note (1):

Net Total Savings in 1991-92 dollars $4042 in

less: 1991-92 Diesel Fuel Rebate Scheme (DFRS) $ 90 2 rn

$3140 m

multiplied by: GDP deflator Q 3% = $ 3 0 4 6 in

plus 1990-91 Actual DFRS 822 m

$3868 nn

This adjustment - to remove the DFRS from 1991-92 savings and replace it with 1990-91 Actual outlays - was necessary to retain consistency with the taxation changes to Fuel Excise, which are calculated on Actual 1990-91 figures rather than deflated 1991-92 figures.

Note (2):

The figures in this column represent the totals of the additional savings/costs incurred in each of the three years as illustrated. For example the savings in Industrial Relations are achieved as follows: $42 million in the first year and $79 million in the second year (that is an additional $37 million). These figures are not representative of the cumulative savings, which in the example

above would be $42 million klus $79 million which equals $121 million over two years.

Note (3): represents ongoing increase/decrease from

previous year

"0" represents no change from the Budget figure

"10" represents a $10 m additional increase/decrease from the previous year (or from the Budget figure if there was no change in the previous year)

233

Chapter 16

16.1 GENERAL SAVINGS (POLITICAL)

ESTIMATED NET SAVINGS: $47 million

The following are some miscellaneous reductions in government spending, which are spread across a number of portfolios:

16.1.1 Government Advertising and Promotional Expenditure

Estimated savings: $40 million

The Coalition will eliminate unnecessary political propaganda advertising by government departments and impose an across-the-board reduction in advertising budgets. In 1989-90 the Government spent $232 million on advertising and promotions, including Government Business Enterprises. For example, $52 million of the Government's total spending is in off-Budget spending for Telecom. A saving of $40 million represents a cut of approximately 23 per cent from general

government advertising.

16.1.2 Political Grants

Estimated savings: $5 million

The Coalition will abolish political grants to trade unions and lobby groups. Trade unions have received in excess of $40 million under the current government. In 1990-91 the trade union movement received over $10 million. Such funding is blatantly used to buy political support. Combined savings from 1991-92 outlays

of at least $5 million are expected. This amount excludes grants under the auspices of the Department of Industrial Relations and is in addition to Department and other savings discussed below.

16.1.3 Statutory Bodies

In 1978 there were 241 statutory bodies. In 1991 there were 956 statutory and non-statutory bodies. Although not directly comparable, the growth in the number of these bodies has been excessive and gone largely unchecked.

The Coalition will aim to reduce the number of these bodies by 25 per cent in its first term. This will be achieved by dissolving those bodies that are currently inactive or unnecessary and rationalising others.

The Coalition will also aim to reduce the number of board members on Government statutory bodies by up to one third where possible and appropriate.

234 Chapter 16

The savings

from this achievement are difficult to quantify at this stage. However, they would be significant, and exemplify the Coalition's commitment to streamline the governmental process.

16.1.4 Ministerial Councils

The Coalition will rationalise the extravagent number of Ministerial Councils which has increased from 27 to 42 under the Hawke Government.

All Ministerial Councils will be reviewed and their continued existence will be authorised by Cabinet. Their guidelines will also be established by, and they will be required to report to, the Cabinet.

The savings from this change are difficult to estimate given the dearth of publicly available information about the total cost of Ministerial Councils. However partial evidence indicates that the savings could be significant.

16.1.5 National Media Liaison Service

Estimated savings: $2 million

The Coalition will carry out its longstanding commitment to abolish the Government's propaganda unit, the National Media Liaison Service (NMLS).

16.1.6 Politicians' Benefits

16.1.6.1 VIP Fleet

Estimated savings: $5 million

The Hawke Government has locked the taxpayer into expensive long term leases, worth over $200 million for the 5 Falcon Executive Jets. With the current depressed market for such aircraft, the return from divesting ourselves of the

leases (after the leases were paid out) would be small.

However, the Coalition is committed to reducing the costs of maintaining the current fleet. We will restrict the use of the fleet by tightening the eligibility for use, saving half of the currrent running costs of $10 million.

The Coalition believes the current level of flights - around 1000 per year - can be halved and a commensurate saving of approximately $5 million from the current $10 million annual expense on running costs can be made.

Chapter 16 235

This saving of $5 million is included as part of the saving for Defence (Section

16.9).

16.1.6.2 ComCar .

Estimated savings: $10 million

The fleet will be reduced (from its current level of approximately 400 cars) to a number which is sufficient to service the Prime Minister, Ministers, High Court Judges, Parliamentary Office Holders and others where there are security considerations.

All other Members of Parliament, (including former Members) their staff and public servants will be expected to use hire cars or Cabcharge for their official car usage.

The reduction in the size of the fleet by over half and associated out sourcing will save an estimated 20 per cent of current expenditure related to services.

This represents a saving .of $10 million, which is included in the savings for Administrative Services (Section 16.4).

16.1.6.3 Expenses

Currently Members and Senators' entitlements are covered by a maze of rules which are costly to administer and do not take sufficient account of the differing needs of Parliamentarians with different electorates and Parliamentary responsibilities.

A Coalition Government will recommend to the Remuneration Tribunal that it replace the current Members' and Senators' separate entitlements with a "global budget" out of which they will be required to run their offices. The existing entitlements to be covered by the global budget include staff, electorate offices,

travel (including travel allowance), stationery, telephones, postage expenses etc.

The "global budget" will take account of electorate size and location and Parliamentary responsibilities. Members in Ministerial, Office-Holder or Committee positions will have their global limits adjusted to reflect different travel commitments. To the extent that the number of Parliamentary sitting days is varied from original plans, members' global budgets will be adjusted.

Members and Senators will be free to determine their own spending priorities within their global budget. For example, members can choose whether to use hire cars or Cabcharge.

Spending under the global budgets will be audited regularly and be available for

236 chapter 16

public scrutiny.

In keeping with the requirement for severe restraint, the amount of the "global budget" will be set at a level 10 per cent below the combined total of equivalent present entitlements. This saving is included in the Departmental Efficiency Saving for the Department of Administrative Services (DAS) (Section 16.2).

16.2 DEPARTMENTAL EFFICIENCY SAVING

ESTIMATED NET SAVINGS: $249 million

The public service has largely been shielded from the same need to reduce costs as the private sector in recent years.

The Coalition will increase the efficiency of the public service and program delivery by providing greater flexibility to department heads and reducing administrative, running and operating costs. The Coalition will give department heads maximum management flexibility and responsibility by providing a single line budget so that they can determine their own resource priorities.

Savings over and above those identified in specific portfolios will be achieved by two methods.

The first will be a 10 per cent saving across all departments' corporate and support/management services. Each department has a corporate and support/management service program which administers and co-ordinates programs within the department and provides management support.

This saving will be achieved primarily through more efficient practices within management services. There will be a freeze on the level of departmental employment, with employment reductions resulting mainly from retirement and natural attrition. Some of the savings made within the first year will be used for redundancies and paying out contracts. The only departments not covered by this saving are Defence and Industrial Relations, which have corresponding savings identified within their portfolio savings. Estimated savings from the 10 per cent reduction in corporate/management services are $183 million, of which 50 per cent

would be expected in the first year.

The second method used to achieve greater efficiency will be to increase the 'efficiency dividend" on running costs from 1.25 per cent to 2 per cent. This increased dividend will apply to all program running costs not specifically targeted in the portfolio savings. Corporate services programs' running costs, and the

running costs of the departments of Defence, Industrial Relations, Prime Minister and Cabinet and Administrative Services are not included in this saving as they are included in the specific portfolio savings. Estimated savings from the

Chapter 16 237

increased dividend are $36 million.

16.2.1 Government Research and Advisory Bodies

Estimated savings: $30 million

There are presently nine Government research and advisory bodies, which cost about $130 million per year. These include:

Australian Bureau for Agricultural and Resource Economics (ABARE) Bureau of Transport and Communications Economics (BTCE) Bureau of Rural Resources (BRR) Bureau of Industry Economics (BIE)

Industry Commission (IC) Economic Planning Advisory Council (EPAC) Bureau of Mineral Resources (BMR) Bureau of Immigration Research (BIR)

Resource Assessment Commission (RAC) - which is dealt with separately in the Prime Minister and Cabinet portfolio.

There is significant scope to rationalise these bodies and contract out many of their reporting functions, achieving management and efficiency savings in the order of $30 million in the second year.

16.3 ABORIGINAL AFFAIRS

ESTIMATED NET SAVINGS: $ 90 million

BUDGET ALLOCATION IN 1991-92: $1,037 million

The Coalition is committed to improving the well-being of Aboriginal and Torres Strait Islander people through better targeted support and by creating greater opportunities through programs of education, training, health and community development.

Since 1984-85, Commonwealth expenditure on programs for Aboriginal and Torres Strait Islander people has increased by over 230 per cent. Over this time there has been little measurable improvement in Aboriginal health or well-being. In many cases, program delivery lacks focus, concentrates on the process of delivery rather than the outcome and lacks any clear overall strategy. This has been highlighted in recent Auditor-General and internal departmental reports.

The Coalition considers that savings totalling $90 million can be made from specific Aboriginal programs in ATSIC and from a number of Government

238 Chapter 16

Departments. (The figure of $1037 million allocated above to Commonwealth

spending on Aboriginal people is a conservative estimate of total spending based on five specific programs). These savings can be largely achieved by more closely targeting programs on the basis of need and through efficiencies in program delivery.

Programs relating to health, housing, infrastructure and educational operational plans are subject to negotiated agreements with the States and Territories. These agreements will be honoured and fulfilled. Such programs, along with Aboriginal training, rental assistance, hostels, language programs and the Australian

Institute of Aboriginal and Torres Strait Islander Studies are considered high priority programs by the Coalition and have not been targeted for savings.

16.3.1 ATSIC

While recommendations have been made as to where savings might be made, the Coalition recognises that ATSIC may have different priorities. Accordingly, and within the spirit of the ATSIC Act, the future Coalition Government will be prepared to negotiate with ATSIC on the exact composition of the savings in its

programs and sub-programs within the overall framework of total savings of $66 million from the 1991-92 Budget allocation of $638 million.

Within ATSIC, the Coalition believes that nearly 80 per cent of the $66 million savings could be achieved from three areas.

(a) Restructuring the home ownership program, which is based on the Aboriginal Housing Fund.

At present, the Aboriginal Housing Fund finances a housing loan scheme to provide home loans at concessional interest rates for Aboriginal and Torres Strait Islander people. The Coalition would propose a restructuring of the program, so that rather than providing equity, an interest subsidy and Government guarantee would be granted. The Defence Services Home Loans Scheme operates in this manner.

In this way, housing assistance is still provided at the same concessional rates, but the delivery of that assistance is more efficient, saving $25 million in a full year of operation. Those people already assisted by the Home Ownership program will not be affected.

(b) Reducing expenditure on the Community Development Employment Projects (CDEP) program by $20 million.

The CDEP program is a community based employment initiative which allows individuals within Aboriginal communities to elect to receive a grant to undertake community development projects, in lieu of the community's Job Search or New Start allowances.

Chapter 16 239

While this program is generally regarded as a productive alternative to

unemployment benefits, it expanded by 720 per cent in the 5 years to 1990-91. This very rapid expansion has caused a number of significant problems which have been highlighted by the Auditor-General. Many projects lack direction, focus or clear community development plans. The Coalition would

halt the further expansion of this program, thereby giving time for communities to clearly assess the community development needs to be met by the program. Savings would be made by not replacing those who elect to drop out of the scheme. In some communities this is as high as 20 per cent per annum. Programs outside major metropolitan areas will not be terminated, unless

the community elects to do so.

(c) Reducing the ATSIC Development Corporation's scheduled final payment from the Commonwealth to $5 million, thereby saving $5 million. However, should ATSIC wish to substitute funding, it may choose to make up the $5 million by selling its excess housing, which it holds in the Northern Territory. Further savings could be achieved by modest changes to Aboriginal land purchase, ($3 m), the enterprise program ($3 m), community development support program, ($3 m), legal aid, ($3 m), and the achievement of efficiencies within ATSIC administration, ($4 m).

16.3.2 Aboriginal Education and Employment

Savings in the Department of Employment, Education and Training will be achieved by -

(a) Aligning eligibility for Aboriginal education assistance to that provided under Austudy and a stricter test of Aboriginality.

Savings from aligning eligibility are $7 million. A recognised test of Aboriginality is applied in many areas of Aboriginal benefits. This is not the case with Abstudy. By applying the accepted test of Aboriginality, savings of at least $3 million can be expected.

Of the total savings of $10 million, $5 million will be made in the second year.

Special tutorial programs and vocational assistance will continue unchanged.

(b) Paying Abstudy from Year 9, or 14 years of age, onwards (instead of from Year 7).

This was originally designed to increase school attendance, which it has done. The Coalition believes the focus of this should now be the later years

240 Chapter 16

of schooling. This measure will save $3 million in the second year.

(c) Allocating Aboriginal Student Support and Parent Awareness (ASSPA) scheme funds on a needs only basis, saving $5 million,

(d) Saving $3 million in running costs associated with Aboriginal Education Employment programs,

16.3.3 Other Savings

Savings in other departments of $3 million including:

(a) consolidating Aboriginal information programs run by the Department of Social Security ($2 million), and

(b) subsuming the functions of the Aboriginal Electoral Information Service into the relevant functions of the Australian Electoral Commission operations ($1 million).

16.4 ADMINISTRATIVE SERVICES

ESTIMATED NET SAVINGS: $220 million

BUDGET OUTLAYS IN 1991-92: $198 million

The Department of Administrative Services provides a range of services to the Commonwealth Government many of which can be privatised or corporatised. It is the Coalition's view that it is not appropriate for the Government to provide services which can be more efficiently performed by the private sector.

Contracting out will improve efficiency in production and distribution, provide clear definition of services costs and a mechanism to monitor them, accelerate the delivery and reduce internal restrictions and cost impediments.

Empirical evidence (Domberger 1989 and Rimmer 1991) suggests that contracting out can conservatively save 20 per cent in the costs of service provision. Domberger suggested these savings could be made in transport, maintenance, construction, cleaning and printing not already out-sourced.

The Coalition's intention in its first full year is to commercialise the activities listed below and, in the second year, to contract out the functions of these commercial units.

Projected savings from these groups (including from contracting out) include:

Chapter 16 241

Australian Property ($21 million)

• • Project Services ($36 million) • Asset Services ($90 million) • Overseas Property ($20 million) • Australian Valuation Office ($6 million)

• Australian Protective Service ($17 million) • ComCar ($10 million) • Australian Government Publishing Service ($16 million) • Australian Surveying and Land Information (ASLIG) ($4 million)

Estimated annual on-going savings will be in excess of $220 million with $100 million to be saved in the commercialisation stage in the first year and a further $120 million in the second year from contracting out.

The savings figure in this portfolio is indicated as higher than total outlays due to the fact that the Department of Administrative Services uses a range of Business Trust Accounts to finance most of its expenditure. The savings in this portfolio include expenditure from these Trust Accounts while the figure for

Budget outlays represents just the non-Corporate Services appropriations for DAS.

16.5 ARTS, SPORT AND HERITAGE

ESTIMATED NET SAVINGS: $60 million

BUDGET OUTLAYS IN 1991-92: $349 million

With Australia suffering the worst recession in sixty years, the Government's spending on the arts, sport and heritage must be subject to the same restraint that is being asked of the entire community.

The Coalition will save $60 million from arts, sport and heritage programs, a saving of about 17 per cent in total spending.

We will encourage greater private sector contributions to organisations such as the Australia Council, the National Collections and the Australian Institute of Sport and participating organisations. These bodies which are currently unfairly discouraged from raising supplementary funds because of the resultant loss in

Government assistance will be allowed to retain a greater proportion of the funds they raise without penalty. They will be encouraged to obtain private sector funds from a combination of voluntary contributions, cultural trusts, company and business sponsorships and their own commercial activities.

16.5,1 Arts

At present the delivery of $53 million in grants payments through the Australia

242 Chapter 16

Council costs $8.6 million. This is equivalent to 1 dollar of administrative costs

for every 5 dollars of grants funding. Restructuring the Council to avoid

bureaucratic duplication will provide considerable savings together with the concentration of the Council's activities on arts funding, ending the funding of programs based on non-arts criteria. Combined savings of $4 million are expected without affecting the funding available to arts-based programs.

16.5.2 Sport

The 1991-92 Budget allocation of $79 million to sport funding is more than two and a half times larger than the allocation of three years ago. Under the Hawke Government, spending on sports has increased more than five-fold. The Coalition recognises the value of sport in building national pride and encouraging fitness

and we will place a high priority on effective sports programs. In keeping with this commitment, the proposed savings avoid any reductions in the costs of sports programs run by the Australian Institute of Sport (AIS) ($26.1 million), but

further AIS capital spending is to be replaced by private funds or deferred or terminated, saving $3 million, while increased cost recoveries and private sector support (this year $4.1 million) and reduced spending on salaries (up 13.7 per cent this year to $9 million) and administrative expenses would save a further $4

million. Funding to the highly political Sports Facilities Program will be reviewed and reduced, saving $10 million. At present the funds under this program are granted by Ministerial decision and have been disproportionately targeted to suit the political objectives of the Government. For example, of the total grant to New

South Wales in 1990-91, one third was allocated to four of Labor's marginal seats (out of 51 seats in NSW). These electorates were the Minister's seat of Calare (with 7 times the average grant per electorate), Hunter, Eden-Monaro and Page. Total estimated savings in sport of $17 million are anticipated.

16.5.3 Film

A Coalition Government will accelerate the rationalisation and privatisation of the film industry and its financing, as it no longer needs to depend so heavily on Commonwealth funds. This follows our overall policy commitment of freeing industry from Government intervention and dependence.

Chapter 16 243

With grants totalling almost $112 million (including the Australian Film,

Television and Radio School) plus considerable tax expenditures (worth more than $20 million), film receives 50 per cent more government grants than all other arts combined, The Government's policy of reducing direct funding is now being reviewed before the expiry of the present grants program next year. To avoid undue disruption to the industry during its transition period, the Coalition will

limit the reduction in direct assistance to $20 million in the first instance. This will be reviewed subsequently. In addition, Film Australia will be privatised, the "national interest" program deferred and re-assessed and the whole structure of support for film rationalised saving $7 million. Total savings from film will be $27 million.

16.5.4 National Collections

Within the Cultural Heritage programs, unnecessary grants, for example towards the Endeavour replica, will not be renewed, saving $1 million,

The National Maritime Museum will be required to obtain greater cost recoveries in a full operational year, saving $1 million.

The Australian National Gallery, which has budgeted spending of $24.2 million in 1991-92, will be expected to cut its capital works spending, seek greater cost recoveries and private sector support. Estimated savings will be $4 million.

The National Library will be expected to do likewise and of its budgeted spending in 1991-92 of $32 million a saving of $4 million will be expected.

The National Museum of Australia's development will be carefully examined with a view to reducing its rate of growth in spending by $1 million.

16.5.5 Australian Heritage Commission

The $1.5 million or 31 per cent budgeted increase in the running costs of the Australian Heritage Commission will be limited to $0.5 million, saving $1 million.

244 Chapter 16

16.6 ATTORNEY-GENERAL AND JUSTICE

ESTIMATED NET SAV[NGS: $52 million

BUDGET OUTLAYS IN 1991.92: $818 million

Expenditure within the Attorney-General's Department (excluding the Business and Consumer Affairs program) has risen by almost 50 per cent in real terms since 1987-88. Much of this increased expenditure has occurred without scrutiny or justification.

The Coalition will save $52 million from this portfolio, a saving of just over 6 per cent.

The following proposed restructuring would result in a net saving of $ 6 million ($3 million in the first year and the additional $3 million in the second year) for the elimination of duplication in (non-Corporate Services) managerial and support functions:

- Abolishing the Office of Chief General Counsel and transferring its functions to the Solicitor-General, the Department, and the Australian Government Solicitor.

- Merging the Office of Legislative Drafting with the Office of Parliamentary Counsel.

- Abolishing the Office of International Law and transferring responsibility for matters relating to international law to the Department of Foreign Affairs and Trade.

- Reducing expenditure on the Human Rights and Equal Opportunity Commission through the use of alternative dispute resolution procedures such as private arbitration outside the Commission.

- Working towards common administrative support systems for the Law Reform Commission, Family Law Council and Administrative Review Council.

Chapter 16 246

While ensuring legal aid to recipients is retained at current levels, savings of $10

million will result from the achievement of efficiency improvements in the delivery of legal aid services, payment of legal aid commissions and community legal centres.

Greater contracting out of Court Building services will result in savings of $11 million.

Enhanced efficiencies in the remainder of the Administration of Justice program and in the National and Protective Security programs will be achieved, saving $17 million ($19 million in the first year and $18 million in the second year).

In accordance with long standing Coalition policy, the Special Investigations Unit will be abolished and further investigations and prosecutions transferred to the Australian Federal Police and the Director of Public Prosecutions. The Australian Institute of Criminology which duplicates a role performed by many specialists and police agencies around Australia, will also be abolished. These decisions will save $8 million.

Furthermore, a Coalition Government would implement immediately user pays and contracting out principles for the delivery of legal services to the Commonwealth. Under the present Government's plans, the Department does not have to charge for legal services until June 1992 and it will not face open competition in the delivery of legal services until mid-1995.

Legal services provided by the Department to Commonwealth agencies should be conducted on a full cost recovery basis. The operations of the Department should, as far as possible, be fully commercialised and the levels of remuneration paid to

its legal officers should take into account their levels of productivity.

It is essential that the Commonwealth and its agencies be provided with high quality legal services. To this end, Commonwealth Departments and agencies should be free to select the lawyer of their choice in any given matter and the Attorney-General's Department should compete openly and on an equal footing with the private sector in the provision of legal services.

246 Chapter 16

16.7 COMMUNICATIONS

ESTIMATED NET SAVINGS: $74 million

BUDGET OUTLAYS IN 1991-92: $1143 million

Total Commonwealth Government spending on communications in 1991-92 will be reduced by 6.5 per cent by the Coalition.

The Coalition supports the Australian Broadcasting Corporation (ABC) and the Special Broadcasting Service (SBS) as providers of high quality programming to all Australians.

Both public broadcasting networks play a vital role in preserving Australian culture and setting high standards for educational, news, entertainment and sporting programs.

The Coalition Parties will ensure that all Australians receive value for money in public spending on ABC and SBS through the achievement of greater efficiency and productivity in the provision of their services. Scope exists for significant expenditure savings in the ABC. According to the Public Sector Union, between June 1988 and March 1991, senior management had grown by 47 per cent. Some

ABC activities are clearly inappropriately and extensively subsidised by the Corporation and therefore, by the taxpayer.

The ABC and SBS will be required to make expenditure savings of around 10 per cent of current outlays, resulting in savings of about $56 million.

The Broadcasting and Radio Communications operations of the Department of Transport and Communications (which provide and install radio and television transmitters) will be asked to save about 10 per cent of total outlays ($159 m) from efficiency improvements yielding total savings of around $16 million.

Consistent with the Coalition's less regulatory approach to communications, we will reduce expenditure on the Australian Broadcasting Tribunal by about $4 million from $9.5 million.

However, the Coalition will increase spending by $2 million on AUSTEL which will play a central role in ensuring that the telecommunications industry is as competitive as possible. This will be particularly important with the pending privatisation of Telecom.

Chapter 16 247

In line with the Coalition's intention to put Telecom on as fully a commercial

footing as possible in preparation for privatisation, the Coalition will bring forward Telecom's repayments of its Commonwealth debt to yield a net additional $275 million a year over the three year program (this saving is shown separately and not as part of the Communications saving). Telecom will be able to substitute

private debt for Government debt.

16.8 CORPORATE LAW REFORM AND CONSUMER AFFAIRS

ESTIMATED NET SAVING: $10 million

BUDGET OUTLAYS IN 1991-92: $271 million

Spending across the Business and Consumer Affairs program which includes insolvency and trustee services, the Australian Securities Commission, the Trade Practices Commission, the Federal Bureau of Consumer Affairs and associated services amounts to approximately $270 million. The Coalition will achieve savings in this current program of $13 million (5 per cent) through efficiency improvements and better cost recovery.

From this saving, the Coalition will provide an additional $2 million to the Trade Practices Commission in recognition of the importance the Coalition places on competition policy. The Prices Surveillance Authority will be retained and will during introduction of the Goods and Services Tax receive an additional 30 per

cent in funding ($1 million) to assist it in monitoring prices .

The Coalition will also carefully review grants to consumer and credit reform organisations in light of performance measures, levels of support and level of need.

16.9 DEFENCE

ESTIMATED NET SAVINGS: $200 million

BUDGET OUTLAYS 1991 . 92: $9435 million (including Corporate Services)

With expenditure of some $9.4 billion in 1991-92, Defence is the fourth largest area of Government spending. For this cost, Australia is not getting good value for money.

The combat elements of our armed forces are relatively small and their ability to sustain military operations is limited. There are currently only six Regular Army

248 Chapter 16

battalions - four of them under-strength - and Labor plans to cut this number by

two. We have fewer aircrews than jet aircraft, a Navy which was at full stretch, maintaining two combat ships in the Gulf War and has more Navy musicians than mine warfare specialists.

By contrast, the defence support functions are disproportionately large. More than half the Army, and just under half those in the other services, are in strictly non-combatant positions. The total number of service personnel in front line combat roles is estimated at 14,505, compared to some 48,000 service personnel in support roles, and 24,000 civilians in the Department of Defence.

This imbalance must be reversed. More money will not solve the problem. Rather, the solution begins with the Department adopting a new management culture, reducing civilian employees where necessary and commercialising defence support positions where this will not compromise combat capabilities.

For example, the now corporatised Australian Defence Industries (ADI) formerly the Government-run Office of Defence Production has reduced the size of its workforce to about 6,000 - a reduction of about 45 per cent. Most notably, staff at ADI headquarters were reduced from 1,300 a few years ago to just 42. From a net

drain on the defence budget of some $1.3 billion in the five years before .ADI was restructured, ADI made a small loss on its first year of operations of $13.9 million, and has every prospect of becoming profitable in the future.

The Government's response to the Wrigley Report cited United States and United Kingdom estimates of savings achieved through commercialisation of between 25 and 35 per cent.

A more rigorous approach to capital equipment cost management will yield savings. For example the Inshore Minehunter project was cancelled in May 1991 only after some $95 million had been spent on developing prototypes which do not meet specifications. In the 1991-92 Budget a further $13 million was allocated to the project despite the earlier cancellation.

A 10 per cent cut in the purely administrative and non-strategic support areas of the Department of Defence combined with a rigorous application of commercialisation reforms will yield savings of approximately $500 million. Consistent with the Coalition's commitment to increase the combat element of the

Defence Forces, $300 million of these achieved savings will be redirected towards enhancing Defence Force combat capability, leaving a net saving of $50 million in the first year and the remaining $150 million in the second year.

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16.10 EDUCATION

ESTIMATED NET SPENDING: $ - 240 million

BUDGET ALLOCATION IN 1991 . 92: $ 8334 million

The Coalition believes education expenditure is a vital investment in our future. It is an integral part of our jobs strategy for the 90's. More than that, it is essential to make sure that Australians of this generation have opportunities equal to the world's best. We have therefore committed ourselves to spending an

additional $413 million (annually) on new initiatives. This new expenditure will be partially offset by expenditure savings of $173 million.

In ensuring opportunities for Australians to lift the level of their skills to international standards, the Coalition will provide an additional $77 million per annum to Technical And Further Education (TAFE) funding. These additional funds will be used to expand places and improve access during this time of

recession.

The early stages of learning are a crucial time for a child's development. To ensure standards in schools are improved Australian education is world competitive and parents and students have greater flexibility in school choice, the Coalition will introduce a number of new programs which include:

a "Schools of Choice" program to support personal choice of specialised programs in science, mathematics and languages other than English;

a "Quality of Teaching" program to support "best practice" initiatives in teaching;

a school level excellence program in languages other than English;

a program to ensure appropriate teaching and concern for gifted children;

National Standards monitoring to provide objective information about standards of learning of key skills and competencies;

Australian Teaching Excellence Awards to acknowledge outstanding achievements made by teachers.

The estimated combined cost of these programs is $33 million.

A central element in the Coalition's approach has been a commitment to parents' right to choose where they send their child to school and for that right to be real for low and middle income earners. One aspect of this is the right of parents to choose a non-government school. In recognition of the severe resource constraints

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which the Government has imposed on the non-government school sector we will

increase the basic per capita grant for students at non-government schools to 20 per cent of the cost of educating a child at a government school. Higher percentages will apply to more needy schools. This commitment will be phased in over three years, from 1994/95, rising in cost to $309 million in a full (the

fourth) year. To further enhance parent school choice the Coalition will abolish the Government's restrictive New Schools Policy at a cost of $10 million.

We are concerned that the infrastructure problems of non-government schools are becoming acute and will double capital funding to non-government schools at a cost of $84 million per year.

The Assets Test for the Assistance for Isolated Childrens' Scheme will be abolished at a cost of $6 million. As well, an additional $10 million will be allocated under the Assistance for Isolated Children Scheme to raise the value of the boarding allowance. In the area of tertiary research, we will commit $13 million for 200 new post graduate research awards and introduce a matching grants scheme between industry and universities at a cost of $25 million.

Taxpayers make a major commitment to Australian education - over $8 billion in 1991-92. They are entitled to have the assurance that their money is spent efficiently and effectively and that the burdens they are asked to carry are minimised.

Students today are required to pay at least some of the cost of tertiary courses. This recognises the significant private benefit from a university education, and ensures a more direct link between the consumers -- the students -- and the providers -- the institutions. This link is important in promoting quality of

educational provision.

Within the framework of the existing Higher Education Contribution Scheme (HECS) it is possible to improve the incentives for students to pay the student charge upfront -- a benefit to students themselves, the institutions, and to the taxpayer. We estimate that a more generous discount rate (25 per cent as opposed

to the current rate of 15 per cent) would increase the payment of upfront fees by 5-10 per cent and conservatively bring forward an additional $50 million of obligations, thus easing the burden on the taxpayer in carrying that debt. Any future modifications to student charge arrangements would preserve this saving.

The House of Representatives Standing Committee on Employment, Education and Training in its March 1991 report noted that compliance surveys undertaken by the Department of Employment, Education and Training have found that between 12 and 27 per cent of students receiving assistance are being overpaid. A Coalition Government will tighten monitoring of payments under AUSTUDY to

curb fraud, and enforce procedures to recover overpayments, saving $90 million (approximately 7 per cent).

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In line with the Coalition's pledge to target student assistance to the most needy,

better targeting could be achieved by setting a minimum threshold on AUSTUDY. AUSTUDY would not be paid to anyone currently eligible for less than $30. Assuming that people receiving less than $30 per week in AUSTUDY benefits receive on average $15 per week (i.e. $780 per year) and taking the January-

March 1991 numbers of recipients to be equal to annual numbers, placing a $30 minimum threshold on AUSTUDY would save $21 million. Tightening the criteria for the operation of the `exceptional circumstances' provision of AUSTUDY would save $6 million. Of the total saving of $27 million, it is anticipated that $13

million will be achieved in the first year and the additional $14 million in the second year.

The eligibility for AUSTUDY will be further tightened by the use of "total remuneration" as the income measure for income testing purposes rather than taxable income, which is used at present. No explicit saving estimate has been included, although it is envisaged that the savings from this measure would be

significant.

AUSTUDY and ABSTUDY benefits will be increased by 6 per cent under the Goods and Services Tax compensation package. The costs are subsumed into the Social Security outlays for the purposes of this package (see Section 16.27 below and Chart 13).

The anachronistic remnants of the failed Priority One project (the Youth Bureau) including its associated grants and publicity activities and the Dawkins centralist National Project on the Quality of Teaching and Learning will be rationalised saving $6 million.

Further details on the Coalition's education policy are explained in the Education Supplement No. 4.

16.11 EMPLOYMENT AND TRAINING

ESTIMATED NET SAVINGS: $265 million

BUDGET OUTLAYS IN 1991-92: $1533 million

Substantial reductions in unemployment will not occur until the economy resumes strong and sustainable growth. This will only be achieved through the implementation of the economic policies of the Coalition.

Expenditure in the Employment and Training portfolio comprises outlays on the Commonwealth Employment Service (CES), apprenticeship and industry training and labour market (employment) programs. The Coalition's expenditure reductions in this portfolio are focussed solely on restructuring labour market

programs and the CES.

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Properly designed labour market programs can help the unemployed become more

competitive for the jobs which are available. Many of the current schemes, which together cost more than $500 million annually, do not meet this objective, often serving the interests of bureaucrats rather than the unemployed.

The Coalition is proposing a fundamental change in direction to ensure that the taxpayers' dollars spent actually help the unemployed to improve their work skills and maintain their sense of self-esteem and place in the community.

We will re-focus assistance for the unemployed to the local community level so that the various and constantly changing needs of unemployed persons can be more flexibly and more efficiently met.

As outlined in Section 15.10, the Coalition will increase spending on Technical and Further Education (TAFE) by $77 million each year in recognition of the importance and effectiveness of this type of training.

Local communities will become responsible for allocating funds under the various programs available, not Canberra-based bureaucrats.

Our approach will be to encourage and equip job-seekers to secure long-term employment, not recycle them endlessly through various labour market programs, nor allow them to languish indefinitely on unemployment benefits as happens now.

For details of the way the unemployment benefit system will work under a Liberal and National Government, see the Social Security section below.

For example, JOBTRAIN, a training program which will spend more than $160 million in 1991-92, assists only one in five participants to find a job. And the Self Employment Assistance Program spent an extraordinary $11,000 per place for just 1,133 participants last year yet there is no apparent assessment of the program's performance.

A Coalition Government will implement a comprehensive strategy to ensure that jobseekers receive effective assistance, including:

16.11.1 Community-Based Labour and Training Programs

Currently more than $500 million is being spent annually on a myriad of labour market programs, excluding formal skills and entry level training programs. Many of these programs are inefficient and do not help the unemployed to acquire the skills necessary to re-enter the labour market, as numerous reports by the Auditor-General have pointed out.

A Coalition Government will refocus the entire labour market program effort and encourage a community-based, flexible and innovative approach to training and

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support programs.

Community based strategies are desirable not only because they allow schemes to be designed to meet differing community needs, but because they also offer much needed community support to the unemployed.

Such an approach was strongly recommended by the Kirby Committee's review of Labour Market Programs in the mid 1980s. The evidence suggests that community-based strategies are more effective in getting people back into the workforce than centrally run programs. About half of all participants in the

existing community-based scheme, Skillshare, either obtained employment or continued in further education.

The Coalition will therefore build on the Skillshare program, while allowing local communities to determine the best means of spending funds allocated for labour market programs.

To achieve this, we will establish Local Employment Boards, comprising locally based business people, voluntary agencies, community representatives and Departmental officers to decide the allocation of funds between the various alternative programs including Skillshare, Job Search Assistance, a refocussed JOBTRAIN (providing longer-term training), JOBSKILLS and Special

Intervention programs to provide basic literacy, numeracy and presentational skills.

Each Board will be allocated funds in proportion to the number and profile of the unemployed in the area for which it is responsible. In this way, programs can be selected by the Board according to regional characteristics and the particular needs of the local community. Board members will be appointed in an honorary

capacity.

A Local Employment Board will have the flexibility of employing existing programs to best effect by relating them to local conditions. It will also have the opportunity to consider new approaches that make the best use of local capacity and expertise but which may not have universal application. The Boards will

operate within specified guidelines that give them flexibility to meet local needs.

Training programs will generally be targeted at people who have reduced prospects of employment and will be integrated into formal structured training.

In view of our policies to limit unemployment benefits to nine months, to introduce appropriate youth training wage rates, to establish 'AUSTRAIN' (see below) and the more effective use of programs through Local Employment Boards we anticipate saving some $140 million from current labour market programs.

Savings will be made in the following areas:

$62 million in the first year from replacement of the wage subsidy program

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JOBSTART with AUSTRAIN

$22 million ($11 m in the first year and $11 m in the second year) from the abolition of the Self Employment Assistance Program. The Coalition does not consider that funding the unemployed to establish small businesses at a cost of $11,000 per participant at a time of record small business

bankruptcies is appropriate

$56 million ($28 m in the first year and $28 m in the second year) savings from the JOBTRAIN program. This program has been strongly criticised by the Auditor-General for failing to provide the long-term unemployed with the skills necessary to obtain employment. On the Department's own

evidence only 22 per cent of participants in the program obtain employment three months after finishing their course. The program will be refocussed to provide more structured training.

This leaves more than $350 million of the current spending to fund our community based strategy.

16.11.2 AUSTRAIN

For those who have received social security benefits for a minimum of six months, special provisions will be introduced to allow the long-term unemployed to accept special 'on-the-job' training wage rates (either 80 or 90 per cent of the relevant award rate). This will ensure that the long-term unemployed are given a real

opportunity to gain on-the-job training to enable them to re-enter the workforce.

The Local Employment Boards will co-ordinate, approve and monitor the placement of AUSTRAIN trainees. This training approach, by allowing the long term unemployed to accept a lower wage for a limited period of time will enhance their skills and future full-time job prospects. It will have the added benefit of

reducing the cost to the taxpayer of the unemployed.

Special safeguards will apply to ensure that full-wage employees are not merely replaced by those persons eligible for AUSTRAIN.

16.11.3 Work-For -Benefit

The Coalition will introduce a voluntary work-for-benefit program for people who have received unemployment benefit for nine months or more, thus giving them access to the job market whilst in receipt of special benefits.

It will be the responsibility of the participant to find such work, subject to the approval of the Local Employment Board, which shall oversee the program in accordance with specified guidelines and appropriate monitoring arrangements.

The program will involve the participant working for 2 days per week in a

Chapter 16 255

voluntary or community-based organisation. For the remainder of each week,

participants will be obliged to actively seek regular employment. Failure to do so could lead to displacement from the program.

The Work-For-Benefit program may also involve regional or rural based private sector employers, subject to agreement with the Local Employment Board that full-time workers are not displaced by Work-For-Benefit participants. Under such arrangements, Work-For-Benefit will generally be for a maximum period of six

months.

For those over 55 years of age, work-for-benefit participation with a voluntary or community agency could be for an indefinite period. There will be a 6 month time limit for those under 55 years. However, this may be subject to extension for a further 6 month period by the Local Employment Board.

16.11.4 Disability Training

In line with our policy to target the Disability Support Pension (see Section 16.27 on Social Security) the Coalition will encourage people with disabilities to enter the workforce where possible.

We will make available an additional $35 million specifically for the training of people with disabilities to facilitate their entry to the workforce. We will consult with peak disability groups such as the Australian Council for the Rehabilitation of the Disabled (ACROD) to ensure that labour market programs are specifically

tailored to meet the needs of people with disabilities.

16.11.5 One-Stop Shop Front

At present, the Government maintains two separate delivery organisations to deal with the unemployed. There is a national network of over 210 regional offices of the Department of Social Security (DSS) employing 13,600 people and administering unemployment payments in addition tt its other social security functions. Additionally the CES, under the Department of Employment, Education and Training, has a network of 332 locations, over 7,000 staff years and

an annual budget of $378 million to assist with job placement, and to administer a wide range of labour market programs.

The Coalition will amalgamate the "shop front" delivery functions of the DSS and the CES.

A recent Auditor-General's report highlighted the advantages of the establishment of a closer relationship between the current functions of the DSS and CES networks. The job placement activities of the CES will be reviewed, and predominantly privatised or contracted out. This will eliminate the existing

unfair competition between private job placement agencies and the CES.

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A $160 million saving in the second year from the DSS/CES amalgamation will be

obtained from one third ($75 million) saving in the CES salaries bill of $227 million, one half ($44 million) savings in the administrative expenses of $89 million and a two thirds ($41 million) saving in the property operating expenses of $62 million.

For further details refer to Chapter 14 "Genuine Assistance for the Unemployed".

16.12 ENERGY AND RESOURCES

ESTIMATED NET SAVINGS: $440 million

BUDGET OUTLAYS IN 1991-92: $652 million

The Diesel Fuel Rebate Scheme for the mining sector will become redundant and consequently will be abolished as a result of the Coalition's decision to abolish excise on diesel fuel. Outlays will therefore be reduced by $425 million. The abolition of fuel excise will significantly reduce the cost of fuel to the mining sector.

Moreover, Goods and Services Tax paid on inputs to business (including mining) will be fully rebated via the tax system.

The Joint Coal Board (JCB) administers a fully funded worker's compensation scheme and statistical analysis of the NSW coal industry which could more appropriately be carried out by the industry itself. The abolition of the JCB will save over $2 million.

In terms of energy use, the Coalition will ensure that the Federal Government and its agencies maintain the best energy management practices so that the Commonwealth plays a leadership role and is able to urge the rest of the community to do as we do, rather than as we say.

Energy research and development is most appropriately carried out by the industries requiring the research to be done.

In the case of fossil fuels, industry organisations exist which already coordinate this research. For example, the oil and gas industry could fund natural gas vehicle research and various projects to improve oil recovery from Australian oil fields.

However, the renewable energy research program components will be retained because renewable energy is of considerable importance in combating the greenhouse effect, and cannot be self-funded as the industry is still very small. Funding for this will be fully maintained.

Some energy management programs that encourage energy conservation and efficiency will be retained. For example, public sector energy management

Chapter 16 257

programs will be reviewed to retain activities with clear energy and cost saving

advantages. These program rationalisations combined with efficiency improvements within the Commonwealth's Energy Research and Development Corporation, will save $13 million.

16.13 ENVIRONMENT

ESTIMATED NET SAVINGS: $10 million

BUDGET OUTLAYS IN 1991-92: $132 million

The Coalition believes that the protection and preservation of our environment is essential to our quality of life. The link between a successful economy and high quality environmental management is well established. The positive economic impact of the Opposition's program will provide enhanced capacity for

environmental care.

Australia's great natural assets are an important part of its attractiveness to tourists both domestic and international. Tourists pose a threat to environmental values and reinforce the need for careful protection and management of natural assets. Tourists should contribute to the cost of maintaining and protecting

environmental values. We believe users of our national parks should contribute more towards their upkeep and the provision of facilities.

The total operating and capital costs for Kakadu and Uluru in 1990-91 were estimated to be $13 million. Receipts from visitors were expected to be only $2 million. Accordingly, fees at Uluru and Kakadu will be increased and collection at the latter improved to raise an additional $2 million in the first year and $3 million in the second year from the total deficit of $11 million.

The Coalition will maintain an independent monitor on uranium mining activities. It will, however, reduce unnecessary overlap between the activities of the Office of the Supervising Scientist (OSS) - with a total staff of 72 - and Northern Territory regulatory authorities. This was a matter referred to in the recent

Industry Commission report on Mining and Minerals Processing. We will undertake a review of the functions of the Office of the Supervising Scientist including the transfer of the Bondi Office to the Northern Territory. The possible transfer of some of the roles of OSS to the Australian Nuclear Science Technology

Organisation (ANSTO) will also be examined. These measures will save $1 million, from the total OSS budget of $7 million.

The Coalition supports the establishment of a non-duplicating national Environment Protection Agency structured on a genuinely Federal basis under the auspices of a Ministerial Council. The Coalition will withhold judgement on the Government's proposed Environment Protection Agency (EPA) until legislation is

258 Chapter 16

introduced into Parliament detailing the Government's proposed role and functions

of the body. The 1991-92 Budget has allocated $8 million to the EPA. Given the Coalition's view that any national EPA should be a genuine Federal body, in co-operation with the States, we will limit Commonwealth expenditure on the EPA to $4 million, thereby saving $4 million.

16.14 FAMILY ASSISTANCE

ESTIMATED NET SAVINGS: -$1060 million

BUDGET OUTLAYS: $1994 million

The Coalition is firmly committed to the family unit as the basic structure of our community. Under the Hawke Government, families on low and middle incomes have been hardest hit by economic mismanagement culminating in the recession.

In recognition of this, and the need to compensate families for the introduction of the Goods and Services Tax, the Coalition, will increase Family Allowances for those on low to middle incomes. Further details on compensation are included in Chapter 13.

16.14.1 Family Allowances

The structure of Family Allowances will be changed.

Families with combined incomes below $30,000 will have their Family Allowance doubled.

Families with income between $30,000 and $40,000 will have their Family Allowances increased by 50 per cent.

Families earning incomes between $40,000 and $55,000 will receive an additional 6 per cent in Family Allowances, in line with Goods and Services Tax compensation. The Family Allowance will then be phased out at the following

income thresholds:

Family with one child $55,000

Family with two children $58,000 Family with three children $61,000 Family with four children $64,000 Family with five children $67,000

The cost of these measures has been estimated from the 1990-91 base year payments so as to be presented consistently with other measures in the taxation reform package. In 1991-92 dollar terms, and after taking account of the tighter

Chapter 16 259

phasing out arrangements for the Family Allowance, the additional spending on

the Family Allowance would cost $1060 million.

16.15 FINANCE

ESTIMATED NET SAVINGS: $6 million

BUDGET OUTLAYS IN 1991-92: $64 million

The Department of Finance plays a crucial role in monitoring, recording and advising on Budget policy developments throughout the Commonwealth Government.

While the main roles of the Department are integral to the proper functioning of Government Budget policy, there is scope for making some savings in the administrative costs of the Department.

In line with the Coalition's commitment to rationalise the costs of Government, we will reduce spending by $6 million from the following areas:

$3 million saving in the administration of retirement benefits

$2 . million saving from the contracting out of some of the ADP and information management services

$1 million saving from a reduction in areas of duplication between the Department of Finance and the Department of the Treasury.

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16.16 FOREIGN AFFAIRS

ESTIMATED NET SAVINGS: $209 million

BUDGET OUTLAYS IN 1991-92: $1466 million

The Coalition in Government has had a proud record in the provision of development assistance and humanitarian and emergency support. Despite the fact that the gravity of Australia's economic situation does not allow us to quarantine aid from the need for substantial public expenditure cuts, the Coalition retains its strong commitment in this area. A return to sustainable economic growth as an objective of our fiscal reform will, in the long term, enhance our

ability to assist developing countries.

With a reduced aid vote the Coalition will restructure but nevertheless maintain a substantial and worthwhile aid program. In many ways the quality of the program will, in fact, be improved. Additionally, the Coalition's commitment to reducing tariff protection to negligible levels by the year 2000 will give developing

countries much better access to Australian markets and a very real opportunity to increase their living standards on a sustainable basis.

The Coalition's aid program will be structured taking into account the following criteria:

The program will be concentrated within our own (Asia-Pacific) region which reflects our foreign policy and trade priorities

There will be increased emphasis on alleviating poverty and on the delivery of services through non-Government organisations (NGO's)

Preference will be given to bilateral aid and the provision of Australian goods and services

Aid will not be applied in the ways which support repressive governments or to those with excessive military expenditure

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In order to avoid wastage aid decisions will take into account the economic

policies of the recipient country

Aid support in forms which are primarily export subsidies will be substantially reduced and ultimately phased out

The cost of administration of the provision of aid will be substantially reduced

The provision for emergency and humanitarian aid will be maintained

Applying the above criteria, savings will total $209 million in two years;

Country programs $112m

International financial organisations and global programs, community and commercial $ 83m

AIDAB Administration $ 14m

$209rn

The regional offices of the Australian International Development Assistance Bureau (AIDAB) will be rationalised

The number, location and cost of overseas posts will be critically reassessed against the criteria of Australia's contemporary foreign relations requirements.

An AUSTRADE/McKinsey type of review will be undertaken of the administration of the Department.

The Coalition's aid program will therefore be substantially different to that of Labor, concentrating on our own region and targeted to benefit those most in need. No longer will major aid decisions be made on the whim of a Minister or directed to the benefit of foreign political parties. The program will be determined and implemented as a genuine partnership between Government and NGOs with major cost savings, more efficient delivery and a greater sensitivity to real need.

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16.17 HEALTH

ESTIMATED NET SAVINGS: $811 million

BUDGET OUTLAYS IN 1991-92: $10,348 million

16.17.1 General Health Policy

The Coalition's health reforms (detailed in the Health Supplement No. 3) are designed to encourage greater self reliance and choice while at the same time ensuring that the needy have access to high quality health care.

Free health care will continue to be available under Medicare for pensioners and card holders, as at present.

In addition the Coalition will extend the Pharmaceutical Benefits Concession Card to the remaining 500,000 current age pension age individuals (and couples) not in receipt of the age pension and with incomes of less than $40,000 (singles) and $50,000 (couples). This move is part of our comprehensive compensation package

with the introduction of the Goods and Services Tax. It will cost $113 million on a 1991-92 basis.

To assist those on low incomes to afford private health insurance, tax credits will be offered to those on incomes up to $30,000. Moreover, for those aged 65 or over and earning $12,000 per annum or less (singles) or $14,500 (married couples), tax credits equivalent to the full cost of basic private health insurance will be

provided. This will lead to savings on public health outlays of $1059 million as a result of the move to private health insurance of an estimated 10 per cent of the uninsured population earning $30,000 or less and below age 65; all of those aged

over 65 with incomes less than $12,000 (for singles) or $14,500 (married couples); and an estimated one third of the uninsured population earning between $12,000 (singles) or $14,500 (married couples) and $30,000 and above age 65.

A contribution will also be made to the Reinsurance Pool equivalent to the anticipated excess burden imposed on the private insurance funds by the increased number of aged contributors taking out Private Health Insurance. This measure will cost $565 million.

Chapter 16 263

Individuals earning over $40,000 and families earning over $50,000 not taking out

private health insurance will be required to pay a surcharge approximately equal to the cost of basic private health insurance. The surcharge will be tapered to begin from $35,000 (single) and $45,000 (family). The savings on Medicare outlays from this measure, estimated at $237 million, are calculated on the basis that all persons subject to the full surcharge will take out private health insurance rather

than paying the surcharge, and two thirds of those in the taper range will take out private insurance.

Bulk billing arrangements for medical services to pensioners and health card holders will remain unchanged. Otherwise bulk billing will not, in general, be available. The rebate for all patient billed medical services will be reduced from 85 to 75 per cent of the Medicare Schedule Fee (70 per cent for pathology). To safeguard chronically sick patients and families the maximum gap between the rebate and the Medical Schedule Fee will be $30 per item, or $300 per family per annum.

Savings arising from the reduction in Medicare rebates and from the restriction of bulk billing to pensioners and cardholders are estimated to be $213 million.

Further proposals to allow private health funds to act as agents for Medicare in providing medical insurance, including gap insurance, do not affect the budget.

16.17.2 Mental Health Initiatives

The Coalition is concerned about those Australians suffering from dementia. The population is ageing rapidly and, given that the prevalence of dementia increases with age, there is an urgent need to develop a range of innovative, flexible and cost effective programs for the care of dementia sufferers.

In the areas of respite care and home and community care, there must be greater recognition of the dementia-specific problems faced by sufferers and their carers.

The Coalition will provide an additional $10 million to widen the current scope of the respite care program, which will include places for working hours, evening and weekend care. Home and community care will also be expanded to assist families of dementia sufferers.

16.17.3 Women's Health

The Coalition is committed to improving access to health care for those women who are currently disadvantaged.

These include women in rural and isolated communities - including Aboriginal and

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Torres Strait Islander women.

There are areas of health care for women which need increased emphasis including the health needs of older women.

The Coalition has earmarked an additional $10 million for a number of specific initiatives to assist in the alleviation of these disadvantages.

16.18 HOUSING

ESTIMATED NET SAVINGS: $ 220 million

BUDGET OUTLAYS IN 1991-92: $1138 million

Housing assistance will reach many more families under the Coalition's Housing Strategy.

At present the Commonwealth and the States jointly provide public housing and other forms of housing support for the disadvantaged under the Commonwealth State Housing Agreement (CSHA). The funds under the agreement go towards the construction, acquisition and maintenance of public housing stock, together with rental subsidies for low income earners.

Of the $870 million to be provided by the Commonwealth in 1991-92 under the CSHA. (excluding Aboriginal housing), approximately $580 million is earmarked by State housing authorities for the construction and purchase of new dwellings or the capital upgrading of existing dwellings.

The Coalition believes taxpayer support for public housing should be in the form of means-tested rental subsidies, with the ownership and management of housing stock resting with the private sector. The Coalition will therefore move towards the elimination of housing payments for capital purposes. This decision will be phased in, starting in our first year in office.

The Coalition will renegotiate the CSHA to direct remaining Commonwealth housing funds towards income support, emergency accommodation and management costs.

The housing and rental subsidy will be able to assist many times more households in any one year as opposed to capital stock accumulation. It will also allow for much greater targeting of funds to the genuinely needy and provide assistance on a more timely and flexible basis.

Equally, public housing tenants should be encouraged into home ownership through the purchase of the homes they occupy under terms and conditions designed to ease the transition.

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As a move towards the achievement of these objectives, which requires the co-

operation of the States, the Commonwealth will progressively within its own budget responsibilities shift the burden of capital provision from the taxpayer to private sector investment institutions. Under the scheme the Commonwealth's contribution to construction costs will be reduced through agreements with major

institutions to take up ownership and management of public housing stock on long term contracts with a fair rate of return.

In its first year of operation, it is estimated that between $100 million and $150 million can be saved while in the second and third years, additional savings of $250-300 million will be achieved providing a total net annual saving of $400 million.

The States will also be given the flexibility to supplement their funds by selling off public housing stocks. To replace Commonwealth funds, they would need to sell approximately 1.5 per cent of their current stock each year.

Current purpose funding is a more efficient and effective use of housing funds compared to capital purpose uses. Although only illustrative (as no consideration is taken of the ongoing costs of private finance and management) information from the Housing Assistance Act Annual Report (1989-90) illustrates the effectiveness of current purpose funding.

For example, in 1989-90 the Commonwealth and the States spent $1,342 million to purchase 2,277 dwellings and construct 10,513 dwellings. $735 million was used to provide rebates and reduced rents to 227,092 households. Therefore for every $1 million spent on capital, 9.5 families were assisted into accommodation, whereas for every $1 million spent on rent assistance, 309 families were assisted -

thus 30 times more families were assisted.

As part of the Coalition's comprehensive Goods and Services Tax compensation package, we will introduce a First Home Owners Scheme to assist first home buyers offset the higher costs of initial home purchase. This Scheme is expected to add an additional $180 million (in 1991-92 terms) to the annual housing budget.

16.19 IMMIGRATION AND ETHNIC AFFAIRS

ESTIMATED NET SAVINGS: $21 million

BUDGET OUTLAYS IN 1991-92: $359 million

The net cost of Australia's entry and migration programs after allowing for offsetting fees and charges is approximately $70 million.

The Coalition believes it is not appropriate for Australian taxpayers to continue to subsidise the costs of the processing of prospective migrants to Australia. The

266 Chapter .6

extension of cost recovery will result in savings of an additional $21 million.

The Coalition government will, however, continue to pay the costs of processing migrants seeking residence as refugees or in distressed circumstances.

16.20 INDUSTRIAL RELATIONS

ESTEVIATED NET SAVINGS: $79 million

BUDGET OUTLAYS IN 1991-92: $269 million (including Corporate Services)

The Coalition is absolutely committed to implementing a new framework for industrial relations in Australia where the requirements of individuals and individual enterprises are paramount. Labor's centralised wage fixing system has resulted in low productivity, high inflation, low real wages and high

unemployment. An enterprise-based system, which gives individuals real choice and incentive and a common interest with their employers in the success of their enterprises, will ensure better working conditions for employees at the same time as improving productivity and business profitability. The changes we propose are fundamental to the revitalisation of the Australian economy.

Many of the Department of Industrial Relations' activities serve to bolster the Government's Accord with the ACTU and reinforce a tops down, bureaucratic approach to industrial relations. The Workplace Reform Program, ($6.5 million net), the union restructuring program ($2 million) and the workplace culture program ($9.4 million) are prime examples, emanating directly from governmentiunion deals. They are contrary to the Coalition's enterprise-based approach and will be abolished.

For the same reason, the Trade Union Training Authority will be offered for sale to the trade union movement in the first instance, and then to any interested buyer. If the Authority is not sold it will be disbanded. This will save $9.7 million in annual running costs, exclusive of any sale proceeds.

The National Occupational Health and Safety Commission was established in 1985 as an element of Labor's Accord with the ACTU. The Coalition Parties opposed establishment of the Commission and continue to do so because we consider occupational health and safety matters are better addressed by State Governments in conjunction with industry. Abolition of the Commission will save $18.5 million.

With devolution of industrial relations responsibility to the enterprise, where it belongs, the need for a centralised department will correspondingly diminish. As a result significant savings will accrue from rationalisation of operational expenses of the Department, including from the abolition of the Public Co-ordination and

Chapter 16 267

Communication Program ($4.3 million), a 50 per cent saving in the running costs

of the Industrial Relations Development Program ($9 million), a 50 per cent running cost saving in the Policy Development and Advice Program ($1.6 million) and a 25 per cent cut in the corporate services program of $3.8 million.

The Public Service Pay and Structures Program and the Remuneration and Conditions Program will be abolished, saving $6 million. Under our Industrial Relations program individual departments will assume responsibility for these functions.

Further savings will be achieved by reducing the running costs of COMCARE by 15 per cent ($4 million), abolishing the political grants made under the migrant worker participation scheme ($0.7 million), and abolishing the Affirmative Action Agency ($1.7 million) but not in any way impacting on the legislative guarantees of equal opportunity. The Department will be required to establish a section within its resources to monitor and ensure equal employment opportunity. Marginal savings will be made in the running costs of the Industrial Relations Commission, Industrial Registry and the Tribunal rationalisation program (combined saving $2 million).

Of the total Budget for 1991-92 of $269 million, $66 million represents special levies for the coal industry and waterfront and another $60 million represents funding for Comcare liabilities. Therefore proposed savings of $79 million represent more than half of variable expenditure. The savings from Departmental changes and from the closure of the National Occupational Health and Safety Commission will not be expected until the second year. This will allow the first year savings from these decisions to be used for redundancy payments.

16.21 INDUSTRY AND COMMERCE

ESTIMATED NET SAVINGS: $53 million

BUDGET OUTLAYS IN 1991-92: $429 million

Australian industry will be a major beneficiary of the Coalition's tax reform package including abolition of the wholesale sales tax, payroll tax, fuel excise and full rebate of GST on business inputs.

Industry competitiveness will receive a major and immediate boost from these initiatives and the Coalition's commitment to reduce industry assistance, both through Budgetary means such as bounties and the acceleration of tariff

reductions. In view of this, and in recognition of the principle that industry should share some of the burden of much-needed expenditure cuts, $53 million will be saved within the Industry and Commerce portfolio by abolishing some programs and rationalising others.

268 Chapter 16

For example, special bounties provided to Kodak and Sirius, which the Coalition

has strongly opposed, essentially because they assist particular firms at the expense of others, will be terminated, saving $13 million.

The National Procurement Development Program and Metal Based Engineering Program, both selective assistance schemes, will also be terminated ahead of schedule, saving $15 million,

Federal funding of the Australian Manufacturing Council will cease and the Automotive Industry Authority will be abolished, given our long-standing opposition to direct intervention in the car industry. Combined savings are $3.9 million.

The recently-announced Advanced Manufacturing Technology Development Program which is a grants based scheme modelled on the National Procurement and Development Program will be abolished and the extension of the Vendor Qualification Scheme abandoned, saving $3.5 million.

Responsibility for the National Industry Extension Service will be transferred to the States in line with long standing Coalition policy, saving $17.7 million.

Such programs are not the answer to the problems of Australian industry - they are bureaucratic, piecemeal and selective. More time is spent complying with guidelines than getting on with the job of becoming competitive.

We envisage the Government's role becoming that of a facilitator - identifying and addressing impediments and bottlenecks and ensuring that at all times the business framework is as competitive as possible. A streamlined and leaner Department will allow appropriate functions to be transferred to areas where industry is concentrated.

16.22 LAND TRANSPORT

ESTIMATED NET SAVINGS: $87 million

BUDGET OUTLAYS IN 1991-92: $1381 million

The Coalition's tax reform package will substantially reduce the cost of land transport in Australia. The industry will be a major beneficiary from the abolition of wholesale sales tax, fuel excise and the introduction of a rebatable Goods and Services Tax.

The Coalition will ensure that road funding is maintained at the 1991-92 level. However, we believe that existing funds can go significantly further in the construction and maintenance of roads through contracting out.

Chapter 16 269

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returned to the Government.

Over time it should be possible to reduce this expenditure further

The Government will spend a net $30.7 million on fisheries in 1991-92. Of that, administration expenses will account for $13.1 million and salaries $4.8 million. This represents an abnormally high ratio of administrative expenses to salaries.

Administration will be cut to $8.1 million, providing a net saving of $5 million.

There will be room for further cuts as staff numbers are reduced and more functions are carried out by the Australian Fisheries Management Authority.

Currently fuel excise is paid on all fuel. The Diesel Fuel Rebate Scheme refunds the excise paid by businesses and individuals, where such fuel is used as a business input. The Coalition will abolish the Diesel Fuel Rebate Scheme for agriculture, as it will remove all excise on petrol and diesel fuel. The removal of

this excise will significantly reduce the costs of primary production and provide a much needed boost during these difficult times.

Saving from 1991-92 expenditure on the Diesel Fuel Rebate Scheme for primary production will be $477 million. As well, any Goods and Services tax levied on diesel fuel used as a primary production input will be fully rebatable.

The Coalition will reform the role and functions of Statutory Marketing Authorities. This will improve the efficiency of resource use in Australia.

16.24 PRIME MINISTER AND CABINET

ESTIMATED NET SAVINGS: $34 million

BUDGET OUTLAYS IN 1991-92: $115 million

Expenditure (including on Corporate Services) by the Department of the Prime Minister and Cabinet has increased by over 100 per cent in real terms since 1983-84 to $134 million in 1991-92.

The Coalition believes that while such a department has a role to play as a Cabinet Office and in terms of policy co-ordination, its growth over the last several years has been excessive.

There is considerable scope for reducing duplication between the Department and other Commonwealth departments and agencies. This will be a primary goal in the first year.

Chapter 16 `271

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The Commonwealth currently owns and operates over 600 trading organisations,

statutory authorities and business enterprises many of which clearly could, and should, be owned by their employees and private sector investors.

The Coalition will encourage all Australians to become shareholders in some of our greatest businesses through a major program of privatisation.

The following organisations have been targeted for sale in our first year.

QANTAS (remaining shares)

Commonwealth Bank of Australia (remaining shares)

• Australian Industry Development Corporation (AIDC) (remaining shares)

• the operations of the Snowy Mountains Engineering Corporation

• Australian National Line (remaining shares)

The Pipeline Authority

the operations of the Commonwealth Serum Laboratories

the Commonwealth's self drive car fleet

The combined net sale proceeds of $13.1 billion in 1991/92 dollar terms over three years will be put towards debt redemption and retirement. This figure represents net proceeds after deducting the wealth compensation and sales tax credit arrangements outlined in Chapter 18. The net sale proceeds will result in a

saving in public debt interest of $1.3 billion in 1991/92 dollar terms.

The implications of the privatisation program for dividend receipts by the Government are considered in Chapter 18.

In the first year of our three year program the Coalition intends raising $4.9 billion in 1991/92 dollar terms in privatisation proceeds. This figure includes the proceeds from the sale of the remaining shares of the Commonwealth Bank of Australia.

In our second year of Government, privatisation proceeds are expected to be $5.2 billion, in 1991/92 dollar terms. By far the largest component will be the sale of the first tranche of the Australian and Overseas Telecommunications Corporation

(formerly Telecom and OTC).

A further tranche of AOTC will be sold in the third year, when assets sales proceeds are expected to be approximately $5 billion.

Privatisation of the enterprises will be achieved in several ways. The main

Chapter 16 273

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In order to strengthen the Prime Minister's direct sources of advice on scientific

and technological concerns, the Australian Science and Technology Council (ASTEC) will be merged with the Science Council, saving $1 million.

The Coalition has always opposed the continued Government funding of the Commission for the Future. The Commission has recently moved onto a commercial footing and should be able to continue with the direct support of the community and business, making for savings to taxpayers of $1 million.

The Coalition will continue the 125 per cent Research and Development tax concession after 1993 with safeguards to prevent abuse, as a means of encouraging and facilitating private sector expenditure on research and development.

16.27 SOCIAL SECURITY

ESTIMATED NET SAVINGS: - $228 million

BUDGET OUTLAYS IN 1991-92: $25,973 million

Savings in the social security area are directed to encouraging greater self-reliance where that is possible. No one is left without a safety net. The reductions apply where employment or some training option is available or where individuals have the means or opportunity to look after themselves.

The need for change in the direction in which the system is moving is demonstrated by the steady growth in dependency. In 1971 there were less than 1 million Australians dependent on Social Security for income support; in 1981, 2.2 million; and now in 1991 3.1 million.

There is need for more of the responsibility for individual welfare to be shifted from the government to the individual.

Outlays on Social Security are $26 billion (excluding the payment of the Family Allowance which is considered in Section 16.14) - the highest of all portfolios and over one quarter of total Commonwealth expenditure. This year Social Security expenditure represents $5016 for every Australian household - or almost $100 per

week. The changes made by the Labor Government to increase the targeting of welfare are an acknowledgment that this issue must be addressed but the drift to greater dependency has continued. As a result Social Security outlays have been increasing and this trend has of course been accentuated during the recession. Unless we are prepared to take a more work-oriented approach to welfare, Australians will be burdened with excessive taxation and restrictions in other

program areas for years to come.

To turn this around, the next Coalition government will embark on a program of

Chapter 16 276

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savings derived from the 40,000 who go off JSA/NSA due to work test

tightening and AUSTRAIN between the 3 and 9 month period are assumed to begin from 9 months, rather than earlier (as would be the case). These savings represent $86.7 million net in the first year, and $260.1 million net in the second.

the claw-back and income test free area on Special Benefits will be adjusted to be the same as for JSA

beneficiaries who lose their benefits as a result of other Coalition reforms, and who have not found work at the end of 9 months' JSA receipt are all assumed to be eligible for Special Benefits (ie there is a 100 per cent crossover for these people). This assumption itself

assumes that all such people will be actively involved in job search and, having been dependent on welfare for quite some time, are likely to pass the Special Benefit income and assets tests.

it has been assumed that each unemployed person's probability of getting a job or going off the benefit is the same, hence, the average benefit of $166.65 has been used in determining savings.

As a proportion of current total outlays on JSA and NSA, the savings presented here represent 2.6 per cent in the first year, and 7.9 per cent in the second year.

First Year Net Saving: $182.9 million

Additional Second Year Net Savings: $555.2 million

Additional Third Year Net Savings: $6.5 million

Total Net Savings: $744.6 million

16.27.2 Wait for Job Search Allowance to be Extended to 3 Weeks

Currently, the wait for JSA payment is one week. This will be extended to three weeks. Individuals will be expected to support themselves during this period. Many already have access to redundancy and other termination payments.

Such a move is in line with general targeting principles. Those who have been in employment can be expected to have accumulated some reserves against the risk of unemployment. Those who have not will be eligible for Special Benefits.

The mandatory 3 week waiting period will not apply to education leavers who will continue to face the present waiting period of 13 weeks, nor persons who within the 3 months prior to their latest claim have received JSA or sickness allowance

The savings are calculated on the assumptions that:

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$155.21.

access to Special Benefits will be provided for those experiencing real financial hardship during the extended waiting period. The estimated cost of this is $10 million.

there is evidence that the Department of Social Security has been assisting older unemployed workers onto the Sickness Allowance and then the Disability Support Pension to get them off JSA/NSA. This practice will be ended.

Proposed first year savings presented here represent 10.5 per cent of current outlays on the sickness allowance.

Net Saving: $52.7 million

16.27.4 Extension and Tightening of the Liquid Assets Test and Leave Deferment Waiting Periods

Currently the liquid assets test onJSA, NSA and the sickness allowance (SA) has a number of loopholes such as the incentive to disperse liquid assets among family and friends to obtain eligibility for benefits. The Coalition will tighten administration and close off such avoidance measures.

There is scope for further tightening. At present, applicants who are subject to the liquid assets test must wait a maximum of four weeks before benefit payment begins regardless of the amount of accrued leave, the size of any termination payment and the value of the individual's liquid assets. The maximum deferment period in respect of JSA/NSA/SA payments is currently four weeks even though the individual may have, say, 6 weeks accrued annual leave.

To achieve better targeting, the liquid assets/accrued annual leave deferment period will be extended to take into account the claimant's liquid assets over $5000. To determine the deferment period, the excess will be divided by 80 per cent of average weekly earnings (AWE).

For example, an accessible termination payment of $15,000 would first be discounted by $5000 (the present liquid assets threshold), leaving $10,000. Dividing this by 80 per cent of AWE (AWE is currently $569.90 per week) implies a wait of 22 weeks before benefits would be paid.

As is current practice, liquid assets test waiting periods will operate concurrently with leave deferment waiting periods, but both these periods will be in addition to the standard waiting period.

Savings are calculated assuming:

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$57.90. The maximum rate will remain at $149.10 per fortnight.

The calculations are based on the assumptions that:

currently there are 68,000 JSA/NSA beneficiaries aged 18-20 receiving the "at home" rate.

- in 1988 parental income and assets tests were applied to 16-17 year old JSA recipients. Out of a then budget allocation for this group of around $83 million, the 1988 initiative saved $33.6 million or around 40 per cent.

- the current outlay on the 18-20 year olds "living at home" group is $264m

- the parental income test will be based on total remuneration rather than taxable income - as proposed above in Section 16.27.5

Net savings from this initiative represent 19 per cent of current outlays on 18-20 year old JSA/NSA "living at home" beneficiaries.

Net Saving: $50 million

16.27.7 Sole Parent Pension to Cease When Youngest Child Turns 12

At present, sole parent pensioners can remain on the pension until their youngest dependent child reaches the age of 16 years.

This encourages sole parents to stay out of employment.

With the provision of increased child care assistance, increased employment entry payments (see Section 16.27.8) and training assistance, sole parents will be aided and encouraged to make an earlier return to work.

Due to changing economic circumstances and social attitudes, in many two parent families both parents work while their children are still at school. The Coalition considers that, in line with these developments, it is no longer fair for sole parents to continue to receive the sole parent pension once their youngest child turns 12.

In the case of sole parents of children, who, for reasons of physical or intellectual difficulty have the need for special care, the sole parent pension will still be available.

For most sole parents, the sole parent pension will be replaced with the JSA when the youngest dependent child turns 12 the sole parent being exempted from any JSA waiting period when making this transition. The mothers'/ guardians' allowance will continue to be paid. Those genuinely unable to find work after 9

months will be eligible for the Special Benefit.

Parents who separate from their spouses when their youngest dependent child is

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elsewhere it was assumed that restricting sole parent eligibility would

induce 10,000 sole parents into the workforce in the first year. If all these claimed a $400 EEP then this would be at a cost of $4 million.

in addition, extrapolating from current EEP take-up as provided by Social Security, there would be around 20,000 claims for the sole parent EEP. Since these would be claimed even without the changes proposed here and any extra payments to these people represent a windfall gain, then the additional per unit cost for these is $300 or $6 million.

in the first year 30,000 long term JSA/Special Benefit recipients will find employment and claim an EEP who would have claimed it anyway, so the cost of this is $3 million, and assuming 40,000 long term unemployed

individuals are induced by various Coalition policies to find employment and claim an EEP, the cost of this will be $8 million.

Net Cost: $21 million

16.27.9 Restriction of Pension Eligibility to Wives of Disability Support Pensioners

At present, wives (including de facto wives) of disability support pensioners are entitled to a pension because they are married to a disability support pensioner, even though not all are required to provide full-time care to their husbands.

There are currently around 25,000 wives receiving such a pension yet their husbands do not require a carer.

This system has encouraged them to stay out of employment, when had they been in paid work, the living standards their families and themselves would have been higher.

The Coalition will cease providing the wives pension for those wives not required as a carer who are under 50 years of age. Job Search Allowance will be available to them. Those making this transition will be exempted from any JSA waiting period. Those who are required as carers will be eligible for the carer's pension.

More than 57 per cent of those on the Wives' Pension are aged 50 or over and will not be affected by these changes, even if their husbands are assessed as not requiring a carer.

Wives of disability support pensioners who make the transition to JSA will have access to training, AUSTRAIN, and other assistance.

The Coalition guarantees to maintain the current Carer's Pension for all carers (including wives) who are required to provide full time care to their spouses.

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A recent ANU study (McCallum, 1991) found that as many as 33 per cent of older

Australians wished to remain employed beyond the current retirement age.

The Coalition will allow those who wish to remain in the workforce, rather than accept the Age Pension at pension age, ultimately to receive an increased pension payment for each additional year of deferment.

Assumptions:

- there are about 130,000 new grants of the Age Pension each year

- for the first and second years, the 130,000 figure needs to be discounted by 13,000 for costing purposes, given the Coalition's intention to progressively raise the pension age for women. Therefore the number of Age Pensions granted can be assumed to be 117,000 in any one year.

the 1991-92 average weekly pension payment is $128.63.

- of the 117,000 grants it is assumed 40 per cent or 46,800 are transferees from other pensions and benefits

- a further 25 per cent or 29,250 are assumed to be already above age pension age and presumably would not elect to defer the pension further.

this leaves 40,950 who would be eligible for the pension deferment plan.

- assuming that 20 per cent or 8190 would elect to defer the pension in the first year, and that the average time they would have spent on the Age Pension for the first year was 6 months, then this suggests first year savings of $27.4 million ($54.8 million for a full year).

- second year savings would derive from another 8190 deferring the Age Pension for the year, plus the remainder of the full year savings derived from those who deferred in the first year, hence $54.8 million in the second year. Full year savings arising from initiatives in the second year and the remainder of savings from first year initiatives amount to $82.2 million.

Proposed first year savings represent 0.3 per cent of current Age Pension outlays, and second year savings represent 0.6 per cent.

First Year Net Saving: $27.4 million

Additional Second Year Net Saving: $54.8 million

Additional Third Year Net Saving: $27.4 million

Total Net Savings: $109.6 million

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eligible to receive the pension at age 60.

The phase-in of a uniform pension age will occur in 6-monthly steps. On the date the policy first takes effect, women aged between 59 and 6 months and 60 years, but not having reached 60 will become eligible for the Age Pension as they turn 60 years and 6 months. Women aged between 59 years and 59 years and 6

months will become eligible as they turn 61. Those aged between 58 years and 6 months and 59 years will be able to apply as they turn 61 years and 6 months, and so on.

Calculations are based on the assumptions that:

as in 1990-91, around 13,000 women will reach 60 years and will become eligible for the Age Pension.

half of these will be women, thus if the Age Pension age for women is raised from 60 to 60 and 6 months for half the women who turn 60 in the first year and 61 for the other half, then approximately 6,500 women will have to wait 6 months extra to get the Age Pension while another 6,500 will have

to wait an extra year.

if the average weekly Age Pension payment is $128.63, this implies a first year saving from the Age Pension program of $43.5 million.

however, a proportion of these women will either go onto JSA, the Wives' Pension or the Carers Pension. Assuming one third do, and the rest remain either financially dependent on their husbands or continue working, then net savings will be $29 million in the first year, with an additional $29

million in the second year as the female Age Pension age rises again.

Proposed first year savings represent 0.3 per cent of current Age Pension outlays, and second year savings represent 0.6 per cent.

First Year Net Saving: $29.5 million

Additional Second Year Net Saving: $59 million

Additional Third Year Net Saving: $29.5 million

Total Net Savings: $118 million

16.27.13 Introduction of a Disability Allowance

The seriously disabled face extra living costs due to their disability. The Social Security Review recommended in 1988 that an allowance to meet some of the additional costs be made available.

Chapter 16 287

91 andei{D g^z

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ueu tBdurt quao iod 01, u-eqq ssat jo s.zauoiSuad

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:3 n43 suoiiduznssr 84 3 uo peseq e.n suotjutnopeo

-aiquxe3 aq 3ou Iti.rn aouemoIW Ijqusia 0143 `edA3 s Tt {^ to s uau1Aed sa 43 o 43!M sy • antaoaa A agq 3uewAud .iagjo Sure 03 ut paigesrp A taaa A as auk

aoJ 9-p$ 3o aou-eMoti AJ3q ju4aoj e aonpo.13ui flLA 3u 0 uivaan.of uoplfeo3 3xau guy

average 1991-92 weekly DSP payments are $141.64

as DSP pensioners transfer to JSA, they are exempted from any JSA waiting periods

The average JSA is $2 per week lower than the average DSP paid

the AUSTRAIN training wage program will be available to any disability support pensioner providing he or she has been in receipt of income support for 6 or more months.

34,000 former disability support pensioners are assumed to join the workforce over the two year period. This is from an estimated 1991-92 disability support pensioner population of 365,000 and this assumes 9.3 per cent will lose eligibility for the pension and go on to JSA.

8500 former pensioners find employment or go off benefits altogether in each of the first two years.

This saving represents 1.3 per cent in the first year and an additional 2.3 per cent in the second year.

First Year Net Saving: $34.4 million

Additional Second Year Net Saving: $61.8 million

Additional Third Year Net Saving: $30.9 million

Total Net Savings: $127.1 million

16.27.15 Two Year Benefits Wait for Migrants

The Coalition will not permit future migrants access to benefits for two years after they first arrive, unless they are given refugee or humanitarian entry status. Access to Family Allowances will however be maintained.

- The Department of Social Security has estimated the total value of social security payments made in 1990-91 to overseas born clients who have been in Australia for two years or less to be $399 million. This did not include Family Allowance nor Family Allowance Supplement.

The Coalition's immigration program will be structured in such a way to minimise the number of new entrants who would go onto Special Benefits if their access to social security was restricted, resulting in a saving of $250 million would be achievable

Chapter 16 289

9 0699

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16.28 TOURISM AND AVIATION

ESTIMATED NET SAVINGS: $23 million

BUDGET OUTLAYS IN 1991-92: $513 million

The Coalition's commitment to remove all fuel excises, including on aviation gasoline, will provide a substantial boost to the aviation- and tourism industries, over and above benefits flowing from our open skies policy and flexible employment contracts.

To achieve greater efficiency in the delivery of government services to the industry, the Department of Tourism will be abolished and its functions transferred to the Australian Tourism Commission (ATC). At the same time the ATC and Bureau of Tourism Research (BTR) will be merged to ensure the industry has access to contemporary and accurate data. This rationalisation will eliminate wasteful duplication and an unnecessary layer of bureaucracy, saving $3 million.

In recognition of the important linkage between Tourism and Aviation, a small Ministerial secretariat will liaise with both the ATC and Department of Aviation.

The Government announced in the 1990-91 Budget its intention to phase in full cost recovery for air safety activities from 1 November 1992. In the 1991-92 Budget this decision was reversed so that cost recovery would only start to phase in from 1 November 1992. The Coalition will implement full cost recovery for air safety activities forthwith, saving $20 million.

None of the decisions taken in the Coalition's Reform Package have affected the current and projected levels of spending on the Aerodrome Local Ownership Program (ALOP) nor the funding of the CAA's air traffic activities for minor airports.

16.29 TRADE

ESTIMATED NET SAVINGS: $70 million

BUDGET OUTLAYS IN 1991-92: $529 million

AUSTRADE delivers some worthwhile informational assistance to exporters, but it is also clear from the recent McKinsey review of its operations that it does so very inefficiently and at excessive cost to the taxpayer. It is also the Coalition's view that the current Government's response to this damning review, which essentially involves changing the management of AUSTRADE rather than the whole structure, is fundamentally flawed. AUSTRADE itself must become more competitive if it is to help Australian exporters to do likewise.

Chapter 16 291

91 i

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16.28.5

Role for Local Chambers of Commerce

Similarly the Coalition will involve local chambers of commerce and other industry representative bodies in the provision of support services at home and promotion activities abroad.

16.28.6 Contract out AUSTRADE Offices in Developed Countries

The Coalition will also aim to save money by contracting out AUSTRADE offices to the private sector in developed countries where the imprimatur of an Australian Government trade bureau is not necessary as it is in developing and centrally planned economies. The McKinsey review of AUSTRADE found that significant

savings could be made through the greater use of locally-engaged staff overseas. For example, it found that a local marketing officer in the US cost $50,000 against $250,000 to have Australian staff based there.

16.30 TREASURY AND PAYMENTS TO OTHER GOVERNMENTS

ESTIMATED NET SAVINGS: $312 million

BUDGET OUTLAYS IN 1991-92: $14,342 million

The largest component of the Department of the Treasury's expenditure is payments to other levels of government. Given that many areas of the Commonwealth's own spending will be reduced by the Coalition Government, it

is necessary to balance the effect on Commonwealth outlays by requiring State and Local Governments to reduce their own spending.

Empirical studies suggest that there is significant scope for the States to contract out. In 1989 a well known academic with considerable experience in this area, Domberger, claimed the State governments could have saved $489 million in 1986-87 from contracting out. Further efficiency and cost savings will be possible as the Coalition's total reform package is put in place.

The Coalition will, therefore, reduce general purpose payments to other governments by 5 per cent ($719 million in 1991-92).

As part of the Goods and Services Tax compensation measures, it is necessary to compensate the States for the loss in revenue collected from their franchise fees. For example, due to the abolition of petrol excise, State franchise fees will fall because they are based on the price of fuel inclusive of petrol excise. The Coalition will allocate $346 million to compensate the States for this loss in revenue, resulting in a net saving from the reduction of general purpose payments of

$373 million.

Chapter 16 `293

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Tm g „ a q q [s it

oge ITtrn uotptiE o3 auk `uo i^?PPL uI

the claims process.

The reforms will lead to greater veteran confidence in a fairer system. This will reduce the number of appeals and therefore costs.

Estimated savings from reform of the claims system, including the Review Board, will be $4 million.

Currently the Repatriation and Artificial Limb and Appliance Centres (RALACs) are estimated to supply approximately 50 per cent of a highly regulated market. Until now commercial suppliers have shown little inclination to fill the needs of country clients or to provide other special services. Until this occurs there will be a requirement for Government to provide these services in one form or another and thus RALACs will remain under Government control. They will, however, be placed on a commercial footing, in competition with the private sector, saving the taxpayer an estimated $3.6 million.

In order to make the market more competitive and more efficient, restrictions on the number of private sector suppliers will be removed.

In addition, the Central Development Unit (CDU) will be abolished as recommended by the Industry Commission, saving $0.4 million.

Combined estimated savings from commercialisation of RALACS and the abolition of the CDU will be $4 million.

16.31.1 Benefit Compensation From the Introduction of the GST

To fully compensate veterans' for the 4.4 per cent price effect due to the introduction of the Goods and Services Tax, pensions will be increased by 8 per cent per fortnight.

The Budgetary costs of this move are included under the "Social Security" outlays in Section 16.27.17.

Chapter 16 295

17. DISTRIBUTION OF THE NET BENEFITS

TO HOUSEHOLDS

17.1 KEY POINTS

The net benefits to households of the Coalition's reform packages are fully funded by the introduction of the GST, the increase in the company tax rate, cuts in government expenditure, collections from the black economy and foreign tourists.

The benefits primarily take the form of massive income tax cuts and generous social welfare compensation benefits.

On average, Australian household disposable incomes increase by $33.54 per week - that is, about 4.6 per cent after allowing for the net price impact of the GST package.

The distribution of net benefits is skewed in favour of the lower income groups.

All groups in the community show increases in average disposable income after allowing for the effects of the GST.

There is a bias in the package in favour of families with children.

17.2 ADDING UP THE BENEFITS

This Chapter quantifies the impact of the Coalition's reform package on the net financial position of Australian households.

A crucial ingredient of the Coalition's refo rm package is that it involves a substantial pruning of the size of the public sector. This has been achieved by better targeting social security expenditures to those who are in genuine need, by encouraging Australians to provide for themselves, by cutting out wasteful expenditures and by improving efficiency in the provision of public services.

All these savings in public expenditures help finance net benefits to Australian households as a result of the package.

Chapter 17 297

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aoueuq oq aigei1eAe anUOAaJ Jo ao.Inas Blau aofeuz e si `aslnoo Jo `osje ZSO mu

• spio ,gasnoq o4 sIjauaq

aq' of uoiingyluoo juupodw we sa^euf osiB `.^eln0t^. 1ed ut `Auzouooa xoejq aq , -siduzaxa .io salea oxaz .1ag1za p.00 a ut uzals,^s aixaeusuzej quaIno aql I T `SgsTjnoq u2iaaoJ puu Suzouooa xoeiq aTp se xions `saoanos anuanaa o4ut deq aafloq oI uza^s^Cs xe s,ecie. Tsny sojgeue d,S J aga jo uollonpoaqu! oqq `.^a4W.M

TABLE 17.1

DISTRIBUTION OF THE NET BENEFITS TO HOUSEHOLDS

INCOME LEVELS % CHANGE IN REAL DISPOSABLE INCOME

Lowest 1 9.6

2 5.4

3 5.7

4 4.6

5 4.0

6 3.4

7 3.4

8 3.3

9 3.5

Highest 10 4.9

TOTAL 4.6

Table 17.1 demonstrates the overall equity.of the reform package. Those who claim that it favours the rich at the expense of the poorest members of our community are simply demonstrating that they do not want to face up to facts. The facts are that the Liberal/National Parties' reform package delivers the greatest benefits to those in the greatest need.

17.3 HOW THE REFORM PACKAGE AFFECTS COMMUNITY GROUPS

The previous section examined the distribution of the net benefits among the population according to their level of income. We turn now to the impact of the reform package on major groups in the community. For that purpose, the population has been divided into fourteen community groups - single and two earner families (with and without children) (groups 1-4), single persons (group 5), part-time (group 6), farmers and self employed (group 7), those whose primary source of income is government pensions or benefits (groups 8, 10-12), other (9) and those retirees who rely on income from their accumulated savings (groups 13 and 14).

It is important to examine each of these groups to ensure that there are no unintended adverse consequences of the reform package. Such consequences arise because the pattern of consumption of community groups differs and because there are variations in the proportions of income consumed by community groups and by income level. Each of the fourteen co mmunity groups, therefore, was further divided into their own income deciles.

Chapter 17 299

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aqi tuoJJ spjoTiasnou of ant os slgouoq ju .iodux! asnuoaq uzaojaa x axrput eq jo s4Tgauaq 4au aq1 uo 2u^.x uiaq jue^xodurt we anpq su.zajqud uoTlduznsuoo

For the fourteen community groups there is considerable variation in the

burden of Labor's hidden taxes - both between groups and with groups by income decile, as shown in Table 17.3 at the end of Chapter 17.

The haphazard impact of these taxes on households is partly the reason why the reform package includes generous compensation for those in the lowest income groups.

The net benefits to households from the package shown in Table 17.4 (displayed at the end of Chapter 17) is after taking account of the effect of imposing the GST and the abolition of Labor's hidden taxes, the family assistance package, the health credits, the personal income tax cuts and the income compensation measures.

On average, Australian households improve their financial position under the Coalition's reform package by $33.54 per week. Importantly, every single group in the 140 groups shown in Table 17.4 enjoys a positive benefit from the package.

One interesting feature of Table 17.4 is the very large benefits to retirees who depend on income from their accumulated savings. On average, married retirees (group 14) enjoy the largest absolute benefits - over $52 per week -from the package.

It is also noteworthy that all family groups (groups 1-4) derive above average benefits from the package.

Because of the variation in group incomes, the absolute amounts of the benefits to individual groups should also be viewed in relation to pre-GST group incomes, which are shown in Table 17.5 displayed at the end of Chapter 17.

The impact of the package is shown in Table 17.6 (displayed at the end of Chapter 17) in terms of the real change in each group's disposable income. Positive increases in real disposable incomes are a measure of the gain from the package as a proportion of income after compensating for the net price impact of the GST. That is, they show the genuine gains in purchasing power generated by the package.

As with the absolute gains, on average every one of the 140 groups shown in Table 17.6 enjoys a real income improvement generated by the package.

The main features of Table 17.6 are:

for a majority of groups, those in the lowest income decile enjoy above average proportionate increase in their real disposable incomes. Thus, the fairness of the package for the whole population stands up when put under the group-by-group microscope. The package is fair for all Australians: anyone who says otherwise does not want to face the facts;

Chapter 17 301

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TABLE 17.8

NET BENEFITS FOR TWO INCOME EARNER FAMILIES (a)

INCOME DECILE

2 CHILDREN ($pw)

4 CHILDREN ($pw)

1 32.31 48.11

2 24.35 45.65

3 20.04 43.92

4 28.74 19.48

5 24.52 18.78

6 30.36 40.06

7 40.63 45.06

8 30.88 32.85

9 38.21 72.66

10 87.86 84.01

AVERAGE 35.94 38.81 -- 1

(a) Single income unit households.

17.4 INDNIDUAL EXAMPLES OF NET BENEFITS

The following individual examples of the impact of the Coalition's reform package illustrate that across a diverse group of families and individuals in a wide range of circumstances the net benefit of the package is substantial.

Each individual cameo includes the effects of the tax reform package as applied to particular households at specific income levels. For this reason, and as the cameo examples are based on single unit income households, the final net effect does not mirror the exact results for average households shown in Table 17.4. Once again, they demonstrate the comprehensive nature of the income compensation arrangements included in the package and the significance of the reform.

Chapter 17 303

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CAMEO 3

SUE AND CON:

TWO EARNER FAMILY - THREE CHILDREN

Sue and Con both work full-time now that their three children are all at school.

Con is a police officer whose base salary is $671 a week ($35,000 a year) but he works extensive overtime which brings in another $575 a week or $30,000 a year. While he earns a lot as a result of his hard work, Con pays hefty income tax - $429 a week.

Sue works as an executive secretary and earns $632 a week ($33,000 a year) but pays $148 a week in tax.

Planning for the future is important to Sue and Con and they both belong to superannuation schemes. Con belongs to the Commonwealth Superannuation Scheme to which he contributes $34 a week ($1,750 a year). Sue, whose employment has been intermittent, contributes $15 a week ($800 a year) to •a private superannuation scheme.

From October 1, 1994, Sue and Con will enjoy big tax cuts plus superannuation rebates. The total effect will mean that they have an extra $136 a week in their pockets.

What about the GST?

After the introduction of a GST - and after the abolition of sales tax, petrol tax and payroll tax - their bills should increase by about $36 a week leaving them $100 a week (or more than 8 per cent) better off.

What about health?

If they do not have private health insurance, they will pay an $800 a year Medicare surcharge. Even so, they will still be nearly $85 a week better off.

Chapter 17 305

CAMEO 4

JULIE: UNEMPLOYMENT BENEFIT (Newstart Allowance)

Julie is 22 and obtained her science diploma 8 months ago but has been looking for work ever since.

Julie lives entirely on the Newstart Allowance of $139 a week.

After October 1, 1994, if Julie was still living on Newstart Allowance she would receive an extra $8 a week to more than compensate her for the one-off price effect of the GST.

Julie's bills should increase by about $5 a week leaving her $3 a week (or about 2 per cent) better off.

The big plus for Julie is that the Liberal/National reform package will increase her chance of getting a job.

CAMEO5

HAROLD AND D ULCIE: FULL AGED PENSIONERS (MARRIED)

Harold and Dulcie live in a regional centre and have been reliant on the government pension since Harold retired 12 years ago. Dulcie left her job at a local factory when she turned 60 just over fifteen years ago.

Both Harold and Dulcie receive the full aged pension worth $6557 each and resulting in a combined income of $252 a week ($13,114 a year) before tax. While they pay tax at a combined rate of $462 a year, this is fully rebated.

When the Coalition's reforms are introduced, the Government will increase the pension paid to Harold and Dulcie by 8% taking their income to $14,164 a year or $272 a week.

After the introduction of the GST - and after the abolition of sales tax, petrol tax and payroll tax - Harold and Dulcie's bills will increase by about $8 a week, leaving them over $12 a week (or 5 per cent) better off.

They will also be eligible for $800 tax credit for private health insurance.

306 Chapter 17

CAMEO 6

PETER:

SINGLE, WORDING FULL TIME

Peter is a 25 year old junior accountant working in a suburban bank branch in Melbourne. He earns $575 a week ($30,000 a year). After he has paid tax of $126, he has $449 a week in his pocket.

After 1 October 1994, Peter will pay $30 a week less tax.

What about the GST?

After the introduction of a GST - plus the abolition of sales tax, petrol tax and payroll tax - his bills will rise by about $25 a week leaving them $5 a week (or about 5 per cent better off).

Chapter 17 307

CAMEO

7

JOHN AND VALERIE & THREE CHILDREN: FARMERS, CENTRAL NORTH QUEENSLAND

John is the third generation to farm his central north Queensland property -and is familiar with the fluctuating fortunes of farming. This year, he expects to make just $6,700.

John's wife, Valerie, recently found part-time work as a secretary. She gets $159 each week ($8,300 a year) but loses $11 of that in tax.

John and Valerie receive a Zone B Rebate which amounts to $5 a week. They have three school age children (all under 13) and receive $110 each week Family Allowance and Family Allowance Supplement.

So altogether, John and Valerie's current weekly income after tax is $386.

If the rules applying after October 1, 1994, applied now, John and Valerie would be better off to the tune of $46 a week - mostly thanks to increases in Family Allowance but also due to increased zone allowances and the tax cuts.

What about the GST?

After the introduction of a GST - and after the abolition of the sales tax, petrol tax and payroll tax - John and Valerie's personal bills will rise by about $16 a week, leaving them $30 a week (or about 7 per cent) better off.

And because the GST - unlike the Government's existing sales tax - is fully rebateable, John's effective operating costs will fall and his farm income should rise.

If John and Valerie have private health insurance, they will receive an additional $300 a year tax credit.

308 Chapter 17

TABLE 17.3

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Chapter 17

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312 Chapter 17

18. TIMETABLE FOR REFORM

18.1 OVERVIEW

Tables 18.1, 18.2 and 18.3 below set out in summary form the Coalition's "Timetable for Reform".

The Coalition proposes that Year One (ie 1993/94) of the three year reform program will concentrate on putting the Federal Government's budget "house" in order by beginning the expenditure cutting program.

In addition, Year One will see an increase in outlays on education, health and age benefits, plus the introduction of the Coalition's capital gains tax changes.

The formulation of the three year program takes account of overseas experience which suggests that it will take 18 months of preparation before the Goods and Services Tax can be introduced. The Goods and Services Tax will be introduced as from 1 October 1994.

Therefore, Year Two (ie 1994/95) of the program will see the most substantial taxation and expenditure changes ever seen in Australia's history. Key elements will be the abolition of wholesale sales tax, petrol excise, payroll tax, the training guarantee levy and no future increases in the superannuation levy.

In addition, there will be the first instalment of a massive $13 billion personal income tax cut accompanied by substantial increases in family benefits.

Year Three (ie 1995/96) of the program will see the further implementation of the package begun in the previous year. In addition, as from 1 January 1996 there will be a further three percentage point reduction in the top marginal tax rate from 45 cents to 42 cents at incomes of $75,001 and above.

In total, over the three years of the next Coalition Government, public sector debt will be reduced by around $13 billion.

Indeed, based on the same budget accounting conventions as used by the Hawke Government, each year of our three year program will see a substantial improvement in the budget position.

Therefore, for illustrative purposes it can be argued that, compared with the 1990/91 budget surplus of $1,896 million, the Coalition would produce budget surpluses of $9,792 million in 1993/94 (ie the $7,896 million balance from the 1993/94 year in Table 18.2 plus $1,896 million), $6,222 million in 1994/95 and $6,907 million in 1995/96.

Chapter 18 313

Table 18.1 below gives a one column summary of the Coalition's three year

program.

TABLE 18.1

SUMMARY OF COALITION'S THREE YEAR PROGRAM (1990191 DOLLAR TERMS)

3 YEAR. PROGRAM ($m)

Ingoings Gross expenditure savings 9696

Tax bracket creep 2933

GST revenue 27152

Payroll tax clawback 1137

Tobacco excise 343

Corporate tax (42c) 975

R+D abuse 50

Medicare levy surcharge 5

Superannuation changes & -

Privatisation proceeds 13080

TOTAL, INGOINGS 55371

Outgoings Charities 50

Disability allowance 55

Disability rehabilitation 34

Sole parents 20

Pension hardship test 40

Family allowance 1028

DSR 96

Child care 90

Tax free savings 520

Capital gains tax 200

Coal export duty 47

Customs 160

Wholesale sales tax 9365

Petrol excise 6601

Payroll tax b 5832

Social security compensation 2440 State franchise fees 336

GST administration 125

First home owners scheme 175

Income tax cut 12486

Education capital grants 81

schools program 150

NSP abolition 10

AIC 16

TAFE 75

University research 38

gifted children 2

schools of choice 10

3 14 Chapter 18

literacy start

5

quality teaching 10

languages 5

Zone rebate 34

Health PBC card 110

reinsurance pool 548

tax credit 853

women's health 10

dementia care 10

PSA+TPC+AUSTEL 5

Defence 291

TOTAL OUTGOINGS 41963

a) Savings from superannuation reform are not included in our bottom line because start-up arrangements are subject to negotiations with industry. However, based on Treasury's own figures it is estimated that savings in the order of up to $300-$400 million will result.

b) This will show up in the Commonwealth budget as "payroll tax abolition grants".

c) Total cost of income tax cut is $12,966 million. That is the $12,486 million during the three year program plus $480 million in additional costs that now into 1996/97 (see Table 18.4) because the second stage of the tax cut begins in January 1996.

18.2 TIMETABLE FOR REFORM

Table 18.2 is costed in 1990/91 dollar terms and represents a net position, in each year, over and above the Hawke Labor Government's budgetary policy. For example, family allowance increases are expected to cost nothing in 1993/94 and subsequently $77 million (in 1990/91 dollar terms) in 1994/95 and, finally, an additional $257 million in 1995/96. That is to say, by 1996/97 the Coalition's family allowance increases will cost revenue $1028 million all up on an on-going basis, compared with the Hawke Labor Government's present

policies.

Chapter 18 315

TABLE 18.2

NET COST EACH YEAR IN BUDGET PROGRAM (1990/91 DOLLAR TERMS)

1993/94 1994195 1995/96

($m) ($m) ($m)

Ingoings Opening balance 0 4154a 729`

Gross expenditure savings 3891 4872 933

Tax bracket creep 0 971 904

GST revenue 0 20364 6788

Payroll tax clawback 0 0 1137

Tobacco excise 0 257 86

Corporate tax (42c) 0 950 25

R+D abuse 50 0 0

Medicare levy surcharge 0 5 0

Superannuation changes` -

TOTAL INGOINGS 3941 31573 10602

Outgoings Charities 50 0 0

Disability allowance 55 0 0

Disability rehabilitation 34 0 0

Sole parents 20 0 0

Pension hardship test 40 0 0

Family allowance 0 771 257

DSR 0 72 24

Child care 90 0 0

Tax free savings 0 500 20

Capital gains tax 35 65 100

Coal export duty 0 24 23

Customs 40 60 60

Wholesale sales tax 0 7024 2341

Petrol excise 0 4951 1650

Payroll tax a 0 4374 1458

Social security compensation 0 1830 610

State franchise fees 0 252 84

GST administration 10 84 31

First home owners scheme 0 131 44

Income tax cut` 0 9004 3482

Education capital grants 81 0 0

schools program 0 75 75

NSP abolition 10 0 0

AIC 16 0 0

TAFE 75 0 0

University research 24 7 7

gifted children 2 0 0

- schools of choice 10 0 0

literacy start 5 0 0

quality teaching 10 0 0

- languages 5 0 0

Zone rebate 0 26 8

316 Chapter 18

- PBC card

reinsurance pool - tax credit women's health

dementia care PSA+TPC+AUSTEL Defence TOTAL OUTGOINGS

TOTAL BALANCE (including asset sales)

110 0 0

0 548 0

0 853 0

10 0 0

10 0 0

3 2 0

100 191 0

845 30844 10274

7896 4326 5011

Health

a) Includes balance from previous year (excluding asset sales) plus $1058 million tax bracket creep from that year, which is returned in 1994/95.

b) Includes balance from previous year (excluding asset sales).

c) Savings from superannuation reform are not included in our bottom line because started-up arrangements are subject to negotiations with industry. However, based on Treasury's own figures it is estimated that savings in the order of up to $300-$400 million will result.

d) This will show up in the Commonwealth budget as "payroll tax abolition grants".

e) Total cost of income tax cut is $12,966 million. That is the $12,486 million during the three year program plus $480 million in additional costs that flow into 1996/97 (see Table 18.4) because the second stage of the tax cut begins in January 1996.

f) Total balance includes proceeds from asset sales (see Table 18.5), in keeping with the Government's budget preparation conventions.

Alternatively Table 18.3 shows the cumulative rise in spending or receipts associated with the Coalition's three year reform program. In this table, the Coalition's family allowance increase can be read as costing nothing in the 1993/94 financial year compared to the Hawke Labor Government's policies, $771 million in 1994/95, and finally an on-going cost of $1028 million (or an additional $257 million) in 1.995/96.

Chapter 18 317

TABLE 18.3

CUMULATIVE COST EACH YEAR iN BUDGET PROGRAM (1990/91DOLLA R TERMS) 1993/94 1994/95 1995/96

($m) ($m) ($m)

Ingoings Gross expenditure savings 3891 8763

9696

Tax bracket creep 0 2029"

2933

GST revenue 0 20364

27152

Payroll tax clawback 0 0

1137

Tobacco Excise 0 257

343

Corporate tax (42c) 0 950

975

R+D abuse 50 50 50

Medicare levy surcharge 0 5 5

Superannuation changes b

- -

TOTAL INGOINGS 3941 32418 42291

Outgoings Charities 50 50 50

Disability allowance 55 55 55

Disability rehabilitation ' 34 34 34

Sole parents 20 20 20

Pension hardship test 40 40 40

Family allowance 0 771 1028

DSR 0 72 96

Child care 90 90 90

Tax free savings 0 500 520

Capital gains tax 35 100 200

Coal export duty 0 24 47

Customs 40 100 160

Wholesale sales tax 0 7024 9365

Petrol excise 0 4951 6601

Payroll tax 0 4374 5832

Social security compensation 0 1830 2440

State franchise fees 0 252 336

GST administration 10 94 125

First home owners scheme 0 131 175

Income tax cut`' 0 9004 12486

Education - capital grants 81 81 81

- schools program 0 75 150

- NSP abolition 10 10 10

- AIC 16 16 16

- TAFE 75 75 75

- University research 24 31 38

- gifted children 2 2 2

- schools of choice 10 10 10

- literacy start 5 5 5

- quality teaching 10 10 10

- languages 5 5 5

Zone rebate 0 26 34

318 Chapter 18

- PBC card

- reinsurance pool - tax credit - women's health - dementia care PSA+TPC+AUSTEL Defence TOTAL OUTGOINGS

TOTAL BALANCE (including asset sales)'

110 110 110

0 548 548

0 853 853

10 10 10

10 10 10

3 5 5

100 291 291

845 31689 41963

7896 4326 5011

Health

a) Includes $1,058 million in Tax bracket creep not included in totals for first year.

b) Savings from superannuation reform are not included in our bottom line because start-up arrangements are subject to negotiations with industry. However, based on Treasury's own figures it is estimated that savings in the order of up to $300-$400 million will result.

c) This will show up in the Commonwealth budget as "payroll tax abolition grants".

d) Total cost of income tax cut is $12,966 million. That is the $12,486 million during the three year program plus $480 million in additional costs that flow into 1996/97 (see Table 18.4) because the second stage of the tax cut begins in January 1996.

e) Including asset sales (ie privatisation program proceeds) which are detailed in Table 18.5.

Although the full tax reform package is completed in the first term, for the sake of completeness the impact on 1996/97 has also been calculated.

The year 1996/97 will see a consolidation of the Commonwealth's budgetary position. During this year, which falls beyond the first term of the next Coalition Government, the on-going cost of the 1 January 1996 tax cut ($480 million) will be fully funded by a combination of $581 million in

additional expenditure savings because of further falls in public debt interest following a planned $5,000 million in privatisation proceeds in that year, plus the commitment to return tax bracket creep (expected to be $866 million in 1996/97, assuming earnings growth of 3.5 per cent).

In addition, 1996/97 will see a continuation of our commitment to increase recurrent funding for non-government schools, for which we have earmarked an additional $150 million in that year. And finally, 1996/97 will also see a further build-up (namely $20 million) in the cost of the Tax Free Savings

Scheme to $540 million (the full year cost after five years is $600 million), a continuation in the Coalition's plan to accelerate tariff reductions (expected to cost an additional $60 million in 1996/97), and finally $269 million to bring on budget the Community Service Obligations of Telecom as a result of the phased

privatisation of that organisation.

Chapter 18 319

All up, it is expected that by the end of 1996/97 (after taking account of the

budget improvement up to the end of 1995/96) and barring future policy commitments, the budget would be in surplus by around $7,691 million

compared to 1990/91.

Table 18.4 below summarises the budget impact in 1996/97 of the Coalition's reform program.

TABLE 18.4

NET COST IN 1996/97 BUDGET PROGRAM (1990191 dollar terms)

1NGOTNGS (Sa m)

Gross expenditure savings 581 Tax bracket creep 866

Privatisation proceeds 5,000

6,447

OUTGOINGS

Income tax cut 480

Schools program 150

Tax free savings 20

Customs duties 60

Community Service obligations 270

980

18.3 BASIS OF ESTIMATES

This section of the paper gives a brief rationale for the figuring used in our tax reform package.

18.3.1 The Three Year Program

It is obvious that Australia's economic problems cannot be solved in one year. Therefore, the Coalition is presenting a three year program which phases in the necessary reforms that will turn Australia's declining international standing around.

The Federal budget deficit constitutes a major erosion of Australia's domestic savings position. Therefore, the first year of our program will concentrate on cutting back government expenditures, and lowering interest rates, which will flow through to the exchange rate which, as a result, will be more in line with

its long run competitive level. It also gives us time to put in place the necessary administrative changes to allow us to implement the major taxation changes as from 1 October 1994.

320 Chapter 18

We believe that this responsible, phased approach adds to the credibility of our

package and signals the length of time needed to make necessary reforms.

18.3.2 1990/91 Base Year

The question of setting the base year for the presentation of budget numbers must necessarily depend upon the reliability of publicly released statistics.

We chose to base our taxation reform package figuring on the 1990/91 year. We did this because it is the latest year for which there is reliable, accurate data on both Federal revenue and expenditure figures.

We considered utilising the release of the August 1991 Federal budget and its economic estimates for the 1991/92 financial year as a base from which to derive our numbers. However, as past experience has shown, the Hawke Labor Government's budget figuring has often contained serious inaccuracies, particularly on the revenue side.

As a result, the Coalition has opted to present all our figuring in 1990/91 terms.

The choice of 1990/91 as a base year means, however, that we have needed to make a special assumption with relation to the Government's expenditure estimates. The expenditure cutting program has been calculated initially against 1991/92 data, as shown in the budget papers, to take account of

decisions made in the 1991/92 budget. The aggregate total savings figure has then been converted into 1990/91 prices using the appropriate yearly inflation figure published in the 1991/92 budget (ie the non-farm Gross Domestic Product deflator) to place them on the same basis as the revenue figuring.

As discussed in the expenditure savings statements (Chapter 16), the approach adopted for the base year, in some cases, has limited the extent of potential savings claimed. For example, the Coalition has recorded savings only for the $56 million nominated in 1991/92 for the "Better Cities" program, whereas the savings from this item will be in the hundreds of millions of dollars in later years.

Finally, it should be noted that while the figures used are in some sense "historical", they are nonetheless accurate and, therefore, give a clear picture of the various orders of magnitude involved in our taxation reform package. Indeed, we believe that if we had decided to use 1991/92 as a base year for our figuring, we may have unnecessarily jeopardised the accuracy of our numbers.

Chapter 18 321

18.3.3 Funding The Program

As can be seen from Table 18.2, it is proposed to stagger the implementation of the Coalition's reform package over three years. In this way, the program can be easily funded and, indeed, permits a reduction in public sector debt over three years of $13,080 million in 1990/91 dollar terms.

Key elements in funding the program include expenditure savings, the introduction of the 15 per cent Goods and Services Tax, the raising of the corporate tax rate to 42 cents in the dollar and the Coalition's commitment to return the proceeds of "tax bracket creep" collected from personal income

taxpayers. In addition, an amount of money will flow to revenue as a direct result of the abolition of State payroll taxes and the introduction of a surcharge on top of the. Medicare levy for high income earners.

The direct budgetary impact of these changes are discussed below.

(i) Expenditure savings

As is explained in greater detail in Chapter 16, the $9.7 billion in gross expenditure savings (in 1990/91 dollar terms) over the three year program can be broken down to a $3.9 billion expenditure cut after netting out changes in spending in defence, social security, housing, tax administration, education,

charities, trade practices and health areas worth $5.8 billion.

As can be seen from Table 18.2, it is proposed that around $3.9 billion in gross budgetary savings would be sought in the 1993/94 financial year.

Included in this first year program would be the implementation of most of the social security reforms, plus the Medicare reforms. It also includes $288 million which represents the reductions in public debt interest resulting from the beginning of the privatisation program.

Gross expenditure savings in Years Two and Three (ie 1994/95 and 1995/96) will also, for example, include the savings to be achieved by removing the diesel fuel rebate. As explained in Chapter 16, the scrapping of this rebate is made possible because of the Coalition's intention of abolishing diesel fuel excise.

It is also worth noting that there will be an additional $581 million in savings in 1996/97 because of further public debt interest reductions resulting from the privatisation program.

(ii) The Goods and Services Tax

The 15 per cent Goods and Services Tax will be introduced on 1 October 1994. Because the changes are not effective from the beginning of the financial year (ie July 1994), the full revenue implications of the Goods and Services Tax are not felt in full in 1994/95 but are spread over that year and the following year.

322 Chapter 18

(iii) Corporate Tax

As noted in Chapter 3, there is a strong case for aligning the corporate rate with the top marginal personal income tax rate to prevent personal taxation avoidance through incorporation.

Therefore, as part of the Coalition's program of reform, the corporate tax rate will be raised to 42 cents as from 1 July 1993. The revenue implications of such a change will not be felt until 1994/95, when businesses will be significantly better off as a result of the abolition of over $7 billion in indirect

taxes on business inputs.

(iv) Tax Bracket Creep

The Coalition gives a commitment to return the proceeds of personal income tax bracket creep.

As Table 18.1 shows, this commitment involves returning $2,933 million in revenue during the three year program.

The $1,058 million figure for 1993/94 and the figures for subsequent years are based on an assumed earnings growth rate of 3.5 per cent in that year.

Obviously, the commitment of returning bracket creep underlies the necessity for the Coalition not to increase expenditure in line with bracket creep growth

This implied expenditure restraint is the reason that permits us to count this money as available for funding taxation cuts in the second and third years.

(v) Payroll Tax Clawback

The abolition of payroll tax in 1990/91 dollar terms would cost $5,832 million. However, there would be what we have identified in Table 18.2 as a "payroll tax clawback" that would net out the full cost of the abolition to $4,695 million.

The $1,137 million ' I clawback" identified in Table 18.2 represents a conservative assumption on the corporate tax effect of the payroll tax abolition.

For costing purposes, the Coalition has estimated that the beneficial effects of the abolition of payroll tax would result in a 50 per cent pass through to prices (ie reduced prices) and a 50 per cent pass through to reduction in costs to business.

This assumption was made to help calculate the CPI and job effects of the abolition. Obviously, a bigger than 50 per cent pass through to prices would mean a smaller CPI effect for the entire tax reform package than the 4.4 per cent we have stated there would be.

Chapter 18

393

The remaining 50 per cent effect of the abolition would obviously go to reducing

business costs. This will permit employers to take on thousands more staff and thus alleviate Australia's unemployment problem.

If, indeed, more staff are employed due to abolition of payroll tax, that would represent a substantial amount of additional income tax revenue flowing to the government.

The Coalition firmly believes that this is an automatic, as opposed to an "incentive", effect. However, in order to avoid any confusion that we are relying on "incentive" effects to fund our package, we have made another assumption for our payroll tax clawback figure.

If not one dollar from the 50 per cent flow through to lower business costs from the abolition of payroll tax went to employing new staff, but instead went all to corporate profits, there would be a significant automatic (ie not related to incentive effects) clawback from abolishing payroll tax because firms could no longer include the cost of paying payroll tax as a deduction for corporate tax

purposes.

While the Coalition reiterates that we believe that the abolition of payroll tax will result in increased jobs in contrast to increased corporate profits to ensure that our finance estimates are not in any way brought into question, we have used the latter conservative assumption to justify the proposed clawback in revenues.

(vi) Medicare Levy Surcharge

As noted in the Health Policy (see Supplementary Paper No. 3) the Coalition considers it is necessary to impose a surcharge on the Medicare levy to encourage high income earners to take out private health insurance.

It is proposed that this measure apply from the 1994/95 financial year, in conjunction with the other Medicare changes.

It is estimated that the full budgetary impact of applying the surcharge will be to save the budget $234 million in 1990/91 dollar terms. It has been assumed for presentational purposes that the vast bulk of these savings are recouped by high income earners moving from public to private health insurance (and therefore included in the expenditure savings figure), and around $5 million in

1990/91 dollar terms of the savings are raised directly by the surcharge.

(vii) Privatisation Proceeds

The Hawke Labor Government's budget convention has been to spend the proceeds of asset sales (ie privatisation) on recurrent expenditure. For example, the Government always quotes budget deficit or surplus figures as inclusive of privatisation sales.

324 chapter 18

Table 18.5

below gives a three year break-down of the treatment of privatisation proceeds.

TABLE 18.5

NET SAVINGS EACH YEAR OF PRIVATISATION PROGRAM (1990/91 DOLLAR TERMS)

ASSET SALES (PRIVATISATION) 1993/94 1994195 1995/96 3 YEAR

($m) ($m) ($m) PROGRAM

( nn)

Gross proceeds 4800 5100 5050 14950

One-off payments - wealth compensation 0 1103 367 1470

- sales tax credit 0 400 0 400

Net proceeds 4800 3597 4683 13080 PDI 288 504 497 1289

In addition the Coalition proposes to raise another $5000 million in privatisation proceeds in the 1996/97 financial year.

The Coalition has presented its figuring on the same basis as the Government, with the critical difference that we have quarantined the use of privatisation proceeds from funding recurrent, on-going expenditure.

All proceeds from. the Coalition's privatisation program have been earmarked for reducing public sector debt or for one-off transitional payments such as the sales tax credit or wealth compensation.

The use of privatisation proceeds for limited wealth compensation and the payment of the sales tax credit is legitimate in a budget sense because, like the proceeds from privatisation, these payments would be one-off and not on-going.

It is also worth noting that as a consequence of ownership shifting from the public to private sector, dividend receipts to the government from privatised assets will be reduced. Over time, this will be offset by an increase in company tax revenue.

However, to the extent that there is a net loss to the budget during the transition period before increased receipts from corporate tax on profits flow in, the three year program outlined in this chapter will enable any shortfall between decreased dividend receipts and public debt interest savings to be

adequately covered.

Chapter 18 325

(viii)

Superannuation changes

The Coalition's superannuation reforms are conservatively estimated to yield savings of between $300 million and $400 million, compared with today, when fully implemented. This estimate is based on the Commonwealth Treasury's own methodology, and is explained in full in Supplementary Paper No 2.

We have not included these savings in our bottom line calculations because the implementation of the superannuation reform package is subject to negotiations with industry.

18.4 RELIABILITY OF FIGURES

The Coalition has taken great care to ensure the reliability of the numbers presented in this reform package. We have on all occasions sought to err on the conservative side when making our calculations.

For example, we have explained previously that while there is strong evidence to suggest the size of the black economy in Australia is around 10 per cent of the size of the economy (or Gross Domestic Product), we have conservatively estimated a black economy of around 5 per cent of GDP.

Other examples, such as the potential proceeds from privatisation, have again been based on conservative expectations.

In addition, the treatment of incentive effects and inflation are two areas in which the Coalition has erred on the side of maximum caution. As a result, our figuring is extremely conservative and significantly under-estimates the huge benefits to be derived from the Coalition's reform program.

The next two sub-sections deal in turn with the treatment of incentive effects and inflation effects.

18.4.1 Incentive Effects

No account has been taken in the Coalition's figuring for the dynamics of change that this reform package will cause.

For example, no account has been taken of the increase in competitiveness of the Australian economy that would result. Calculations done for the Business Council of Australia on the ORANI economic model show that the scrapping of the wholesale sales tax and its replacement with a Goods and Services Tax

alone, could boost GDP by up to 1 per cent, or around $4 billion. This change alone could boost revenue collections by some $800-900 million - none of which has been taken account of in the Coalition's figuring.

326 Chapter 18

Indeed, if it were not for the incentive effects of the reforms proposed, there

would be no reason for undertaking them. We have, however, taken an extremely cautious approach by not including'any revenue from these obviously beneficial effects.

The changes proposed will have unambiguously positive incentive effects. Honest, hard working Australians will be treated much more fairly than today and as a result will have a strong incentive to work harder, to save and to invest.

No account has been taken in our package of the positive employment effects of a massive reduction in personal income tax and associated marginal tax rates. Academic Iiterature from both overseas and Australia clearly shows that a reduction in personal income tax does have a positive employment effect - and that this translates through to higher income tax receipts.

Indeed, studies show that between 20 per cent and 40 per cent of the initial cost of the income tax cut will be recouped by an increase in employment and the incentive to work. Even just a 10 per cent clawback from the Coalition's proposed income tax cut would see a $1.2 billion increase in revenues above what we have estimated.

For example, before becoming Chairman of the Federal Reserve Board of the United States, Dr Alan Greenspan undertook research work on the incentive effects of tax cuts. He estimated that about 20 per cent of the gross revenue loss from a tax cut would be recouped through additional revenue yielded by the resulting expansion of the economy.

In addition, Dr Michael Boskin, current Chairman of US President Bush's Council of Economic Advisors and formerly of Stanford University, has concluded in previously published work that up to 40 per cent of the gross revenue Iosses have been actually recouped as a result of the previous Reagan administration's taxation cuts.

These results have been quoted favourably in Australia by Professor John Freebairn and Professor Michael Porter of Monash University, and Professor Cliff Walsh of the Australian National University. For example, in their 1987 book Spending and Taxin , the authors noted (on page 18) that an income tax

cut with a 10 per cent Goods and Services Tax introduction would have the following result:

"On the basis of present levels of private income, and the proposed indirect tax rates and the new marginal income tax rates, roughly $2 billion of additional tax revenue will be generated, thereby offsetting around 40 per cent of the revenue effects of the tax cuts themselves."

Chapter 18 327

In addition, apart from the positive impact of income tax cuts, academic

literature suggests that significant efficiency gains, and ultimately revenue gains to the government through expansion in the economy, will result from the Coalition's expenditure cutting program.

Research work begun by Professor E K Browning of Texas University in 1976 has shown that the marginal welfare cost of government spending programs (caused by the distorting effect of taxes needed to fund the programs) can range between 9 per cent and 50 per cent of the funding required.

Work done in Australia by C C Findlay and R L Jones in the early 1980s and published in the Economic Record suggests that the efficiency losses of government spending programs in Australia can range between 23 per cent and 65 per cent of the revenue spent. This work would, therefore, suggest that the

Coalition's $3.9 billion expenditure cutting program would generate additional welfare gains for Australia of between $920 million and $2,600 million in 1990/91 dollar terms. That is over a 0.6 per cent increase in GDP, and possibly

more than $600 million in increased taxation collections.

Finally, the Coalition's entire reform package including a bold plan of accelerated micro economic reform, should, as described elsewhere in this paper, boost Australia's long term GDP by several billion dollars.

The revenue implications of these policies are enormous and bode well for future tax reform.

18.4.2 Inflation Effects

The Coalition believes that it has substantially over-estimated the one-off CPI impact of its taxation reforms. As a result, our compensation packages represent over-compensation for any once-off price effect of the introduction of the Goods and Services Tax.

As explained in earlier Chapters, the one-off CPI effect of the taxation reforms would be 4.4 per cent. However, as also noted, the Coalition believes that this is a very conservative estimate of the actual CPI effect. Many authoritative commentators consider the non-farm GDP deflator to be a more accurate

measure of inflation. The once-only price impact of the package as measured by the non-farm GDP deflator would be 2.2 per cent.

Our 4.4 per cent calculation, for example, takes no account of the phased reduction in customs duties which will significantly reduce price levels of textiles, clothing, footwear and motor vehicles, in particular, over a number of years. Indeed, over time, such customs duty reductions will have a significant impact on the CPI.

In addition, we believe that we have under-estimated the positive price reducing impact of the abolition of petrol excise.

328 Chapter 18

The burden of petrol excise is borne in the price of virtually every good and

service produced in Australia. This is because virtually all production processes at some stage involve transport haulage which attracts the high penalty rates of petrol excise. Because of the partial nature of the economic modelling available, it has not been possible for us to calculate the full positive

flow-through of the excise's abolition.

The implications of taking these conservative assumptions are clear. The one-off price impact of the package can have a significant impact on budget numbers. As noted earlier, we are expecting a 4.4 per cent CPI effect from the introduction of the Goods and Services Tax which will be compensated for. Again, to be conservative, benefits have been generally increased by 6 per cent and age, service and other pensions by 8 per cent. To have over-estimated the CPI impact by just one percentage point (ie 3.4 per cent effect rather than 4.4 per cent) would reduce government outlays by up to $550 million in social security compensation alone.

Because the Coalition wished to err on the side of caution and to ensure that people will be more than adequately compensated, we have decided to use the 4.4 per cent CPI change for our compensation package. However, the reader should note that to use the possibly more accurate 2.2 per cent deflator would have produced a social security compensation package more like $1.2 billion, or a massive $1.2 billion less than we have catered for.

18.5 CONCLUSION

To summarise, wherever possible the calculations used to formulate the package have been conservative. As examples, we have:

• under-stated some expenditure cuts; • over-stated the inflation impact using the CPI rather than non-farm GDP price deflator; • over-compensated - especially pensioners and the aged;

under-stated the size of the black economy; • taken no account of additional revenue from obvious incentive effects; • phased in expenditure cuts when earlier savings may have been possible; • conservatively estimated privatisation proceeds; • under-estimated beneficial price effects of fuel excise abolition.

The following table gives a summarised rundown of the Coalition's three year legislative program.

Chapter 18 329

TIMETABLE FOR REFORM

THE FIRST HEWSON GOVERNMENT

FIRST YEAR SECOND YEAR THIRD YEAR

Immediate intro. of legislation for reform program:

- Labour Market - Broadcasting Services - Telecommunications - Customs (Dumping) • Land Transport - Navigation • Social Security - Higher Education - Abol. Training Tax Reforms

Levy

- Reserve Bank - Income tax cuts

GST introduced

Development - streamlined approval process - reverse Coronation

Hill decision - Marandoo, Wesley Vale - Abolition of: Privatisation . WST

Program commences: . Petrol Excise Payroll Tax

- Commonwealth Bank . Coal Export Levy - AIDC . Oec. Super Levy

- Qantas - Dependent Spouse

- Pipeline Authority Rebate Changes & other assets

Banking All Compensation

adjustments

Road Transport Reforms commence . Privatisation of: Telecom Commences Tariffs phase-down

Reduction of continues

government, wast, inefficiency - contracting out

330 Chapter 18

. Power-Auselgrid

Communications -call for licences

Tax Changes - Capital Gains Tax - Health Care Tax Credit

New initiatives - School Funding phasing begins - Addit. research

funding card extended - Health Reforms begin

Immigration reductions

Accelerated Waterfront reforms

Closer Economic Relations with New Zealand accelerated

Federal/State Relations Inquiry

Benefits commenced:

Family Allowance • First Home Owners Scheme

Zone Rebates

Superannuation reforms

. Savings Initiative

Chapter 18 331

References:

1. John Free bairn, Michael Porter & Cliff Walsh, Editors, Spending and Taxing, Australian Reform options, Allen & Allen, 1987

2. CC Findlay and RL Jones, "The Marginal Cost of Australian Income Taxation", Economic Record, Vol 58, pages 252-262, September 1982

3. EK Browning, "The Marginal Cost of Public Funds", Journal of Political Economy, pages 283-298, April 1976

332 Chapter 18

19. RESTORING SUSTAINED EMPLOYMENT GROWTH

19.1 INTRODUCTION

This paper summarises three projection scenarios prepared by Access Economics which seek to define the broad direction and magnitude of the policy change required to achieve full employment, stabilise our debt and enter the next century with living standards rising.

The Access Economics projections, which have been made available separately in the Supplementary Paper No 1, attempt to illustrate the consequences of failure to tackle our basic structural problems which impede our competitiveness and our savings behaviour (the "Base Case" and "Low Road" Scenarios) and the extent of the policy induced surge in productivity which would be necessary to rectify the situation by the Year 2000 (the "High Road" Scenario).

While a number of elements of the policy change underlying the "High Road" Scenario are similar to those embodied in the Coalition's policy package, the analysis does not purport to portray the outcomes which would be achieved by implementation of that package.

Indeed, since the extent and scope of reform contained in the Coalition's policy package is without precedent in post-war history, it is unlikely that models based on economic performance over that period would be able to capture accurately the outcomes which might be expected to flow from its implementation.

The Access Economics analysis summarised below must be seen primarily as providing a framework for the debate about medium-term solutions to our economic problems which must occur if we are to avoid a further decline in our living standards.

19.2 LABOR'S APPROACH

The legacy of almost a decade of Labor Government mismanagement is now evident.

The recession "we had to have" has:

• cost 223,000 Australians their jobs over the fourteen months to September 1991;
• over the same period, discouraged a further 140,000 Australians from looking for work;

[333]

• pushed the rate of unemployment above 10 per cent, and it is still rising;
• cut a swathe through Australia's manufacturing heartland, with employment falling by 6 per cent in Victoria from its pre-recession peak;
• shattered business confidence, with business investment set to fall by over 10 per cent this year even according to the Government's own overly optimistic Budget forecast, on top of the 12 per cent fall in business investment last year;
• put paid to the myth that the Commonwealth has transformed its budget into permanent surplus; and
• left most Australians going out backwards in terms of living standards, with those living on the land suffering the greatest agonies. Overall, real household disposable income per capita has fallen by a massive 4.3 per cent over the six quarters to the June quarter 1991.

With one exception, policy sclerosis now affects every economic decision-making area of government:

• Labor called a halt to cutting Commonwealth government expenditure when it got to be too difficult in its so-called "Bringing Home the Bacon" Budget in 1988.
• Labor gave up on tax reform when its 1985 Tax Summit turned into a fiasco. Labor has never tried to put in place genuine labour market reforms.
• Labor has been long on talk about Australia's microeconomic handicaps but has fallen short on taking action to remove those handicaps.

Instead, Labor's approach to economic management has been to rely on interest rates, and nothing much else but interest rates. Labor's high interest rate policy crushed the life out of the Australian economy:

• High interest rates made it more difficult for those wanting to own their own home to finance a mortgage.
• High interest rates have pushed thousands of businesses into bankruptcy.
• High interest rates have caused some financial institutions to renege on their depositors, some others have been the subject of rescue operations.
• High interest rates have brought property prices crashing down.
• High interest rates have made it unattractive for businesses to invest.

[334]

• High interest rates have held up the $A, making it more difficult for

Australian companies to compete for market share internationally.

In short, high interest rates are a powerful weapon for bludgeoning an over-exuberant economy into submission.

19.3 THE QUALITY OF THE RECOVERY

In the face of overwhelming evidence of the severity of the recession, Labor's approach has been to do an about -face on interest rates. Over the past 22 months the cash rate has been more than halved.

Because of the trauma the recession has caused so many Australians, the cuts in interest rates will take time to stimulate demand. Nonetheless, the large reduction in interest rates since the first easing in January 1990 has already led to a pick up in the housing industry and consumer spending is also starting to

show early signs of revival. There are also the usual cyclical contributions from stocks and net exports. Also, the automatic stabilisers, together with deliberate policy changes, have been working to push the Federal budget deep into deficit.

The balance of probabilities is that there will be a cyclical recovery in 1992. Such a recovery would be short-lived if there is a double-dip recession in the United States. Even if the major industrial countries continue to grow in the year ahead, however, Australian's cyclical bounceback is likely to be more subdued than in previous recoveries from recessions.

Of course, there is a strong possibility that Labor will panic in the face of mounting unemployment, especially as the strain caused by the disunity that is racking Labor becomes intolerable. In that case, interventionist policies might produce stronger economic growth in the short-term at the cost of greater economic dislocation in the medium term. Australia would certainly throw away the chance of locking in lower inflation. The balance of payments bogey would re-emerge. The blow-out in foreign debt would bring about yet another recession that Australia "had to have".

Leaving aside the policy panic possibility, Australia's cyclical bounceback is likely to be weaker than in previous recoveries from recession because:

• the rest of the world is not going to give Australia a boost out of recession, as has sometimes occurred in the past. The United States and Canada are showing signs of picking up but Germany and Japan are still slowing. There is no likelihood of an across-the-board resurgence in demand for our exports in the major industrial countries. Commodity prices are likely to remain soft for some time and in the case of Australia's premier primary industry, there is the stockpile of 4.5 million bales overhanging the market;

[335]

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Jun-90

Mar-91 Dec•91 Sep-92

10

8

6

4

2

0

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CPI inflation falls to a low of around 1 1/ 2 per cent in late 1991 but picks up steadily thereafter. By the June quarter 1993 the CPI is 5 1/ 2 per cent higher than the June quarter 1992. Inflation picks up because of the growth in wages, the rebuilding of profit margins by companies as demand firms, continuing pressure on State and local government charges and some weakening in the value of the $A;

Chapter 19 337

61 .wjdi3Lj:

26-966T u? dUD jo Juao .iod z/ j g o4 duznC oq qnq 96-I66T uF dUD o1 anrw-eja a Iwo .xad I, jo qutod MO l i uo fl3aa of jseoaioj s un000B 1ua.7.In 3 squausiled jo aourreq aqq `opi jo suual aql uxoij papoadxa aausgsissu on u^ip •juao .z e d z/ i g cq dumC oq jseoaaoj oxe si^oduan `quad aad ^/ It Xq

asp 04 Iseoa.roJ sY pueuzap oz sauzop uagns £6-Z66T u I 'Z6-T66T ui P e tmu aq

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oq Mols o4 IcIaxtI sr lgjmo.z iodxa `siBDk quaoax uT q'Mo.z uo.rrs 2uiMoTJoJ

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In short, a LiberaUNational Party Government is forecast to inherit an economy

that will be characterised by:

weak growth; excessive real wages; unemployment stuck in double digits; inflation rising to around 5'/ 2 per cent; and re-emergence of the foreign debt problem as the anaesthetic administered by the recession wears off.

Given Labor's blinkered approach to economic policy, Australia will be entering 1993 with Labor grappling with the unpleasant alternatives of either pushing up interest rates or presiding over a further blow-out in Australia's foreign debt.

19.5 THE TASK OF RESTORING SUSTAINED EMPLOYMENT GROWTH

Given the unfavourable starting point going into 1993-94, the task of restoring sustained employment growth and bringing down the rate of unemployment over the remainder of the 1990s will be daunting.

Essentially, the task involves:

generating sufficient economic growth to create jobs for new entrants to the labour market and for half those in the unemployment pool, many of whom will have been unemployed for months and years, rather than weeks;

while at the same time, avoiding rekindling inflationary pressures; and

stabilising Australia's foreign debt. The option of using Australia's once internationally-admired credit status to borrow to generate jobs was foreclosed by Labor in the heady 1980s.

Chapter 19 339

61 a?dHuo 00

.

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• soiuiouoog ssaooy Aq pax da.ad sou-euaas oq4

uo gioda.z in unnogs a.it, soT aiauaos auq 2uiA iopun suotrdumssu aqp uo sjielap wwnj

.xao^s I-el;dro aua uo puu `gqop Ieuaa4xa

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The Base Case produces the lowest employment growth because it fails to do

anything about the excessive growth in employer real wages that - paradoxically - occurred through the 1990-91 recession and its aftermath, As shown in Chart 1, by 1992-93 employer real wages are likely to have increased by 7.3 per cent from the 1988-89 low point. This increase is not far behind the 8.3 per cent increase which occurred in the two years to 1982-83 and which is widely credited

as being the major factor causing that recession.

Chapter 19 341

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Under the Base Case, the 1992-93 level of real wages is locked in over the

remainder of the decade. Given the Base Case labour force participation rate projection, 1.7 million jobs would have to be created in order to bring the unemployment rate down to 5 per cent by the end of the decade. The Base Case scenario falls short of this target by 340,000 jobs. There is a cyclical fall in the

unemployment rate to 9.1 per cent in 1993-94 but very little progress in reducing unemployment thereafter. Unemployment remains above 8.5 per cent until the end of the decade (see Chart below).

Unemployment Rate

12

scenarios

1a i m

4

• s

1975-76 1979-80 1983-84 1987-88 1 991-92 1995-96 1999-00

— Base Case -- Low Road — High Road

The maintenance of real wages in the Base Case also creates a climate that is hostile to business investment, Business investment is weakest under the Base Case scenario and the growth of the capital stock slows to a productivity sapping 1.1 per cent per annum on average, compared with 3'/ 2 - 4 per cent per annum over the previous decade and a half.

The Base Case demonstrates the important role that lower real wages needs to play in tackling Australia's unemployment problem over the medium term. It is clear from the "Low Road" scenario, however, that more needs to be done than simply lowering real wages if Australia is to go close to realising its economic potential over the rest of the decade. The fall in real wages of 1.8 per cent from

1990-91 to 1999-00 under the "Low Road" scenario sees an additional 270,000 jobs created than under the Base Case. Unemployment falls by more than in the Base Case but progress is painfully slow and even by the end of the decade, unemployment is still hovering around the unacceptably high level of 7 per cent.

Moreover, the "Low Road" scenario fails to stabilise Australia's foreign debt, even though it represents a small improvement over the Base Case foreign debt burden. Under the "Low Road" scenario, foreign debt would jump from 33.4 per cent of GDP in 1991-92 to 59 per cent of GDP and rising. (Under the Base Case foreign

debt would be 62 per cent of GDP and rising.)

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The favourable economic effects of the lift in productivity under the "High Road" scenario are reinforced by a cut in government consumption spending that lowers government expenditure in 1995-96 to its 1992-93 level, compared with a 6.6 per cent increase under the other two scenarios. This allows both lower income taxes

than the other scenarios and reduces government borrowing, and induces a lower exchange rate. This encourages net exports and results in a lower current account deficit to GDP ratio of 3.7 per cent in 1999-00, compared with 4'/ 2 per cent under the "Low Road" scenario. Foreign debt is 54 per cent of GDP at the end of the

decade and falling by 0.8 percentage points per annum.

Most important, faster economic growth - by 0.9 percentage points per annum -under the "High Road" scenario and the lower real unit wages costs outcome lead to the creation of over 2 million jobs. This is enough to produce a return to full employment by the end of the decade. Unemployment falls to 5.2 per cent by the

year 1999-00.

Australia can achieve growth in living standards over the 1990s at a rate that is comparable with earlier decades despite the severity of our economic problems providing there is a willingness to embrace economic reform. The process of structural change required to achieve the "High Road" outcome would be

unparalleled in the experience of most Australians. It requires the movement of 4-5 per cent of our resources into the traded goods sector in order to jump the debt hurdle.

We have not been able to achieve that in the past because Labor's willingness to embrace reform has been lukewarm or absent. Failure to adopt the wide-ranging economic reforms required to get Australia onto the "High Road" will mean the 1990s will be the decade of lost opportunities.

The scenarios show that the stakes are high. We will all be losers if we regard current economic policy as being on track. To be winners we must back the far-reaching changes that are fundamental to restoring sustained employment growth to the year 2000.

345

Chapter 19

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