House of Representatives

Incomes Tax (Arrangements with the States) Repeal Bill 1989

Incomes Tax (Arrangements with the States) Repeal Act 1989

Second Reading Speech

By the Treasurer, the Hon P.J. Keating, MP

I move that the Bill be now read a second time.

This Bill will give effect to my announcement of 12 March this year that the Government would repeal the Income Tax (Arrangements with the States) Act 1978.

It will also make a number of consequential amendments to the income tax law to dismantle the mechanisms that authorise the Commissioner of Taxation to administer State income tax laws.

Mr Acting Speaker, the legislation we are acting to repeal today constitutes the last relic of the Fraser Government's ill-fated 'New Federalism'.

This legislation enabled each State, if it so chose, to legislate to increase personal income taxes or to give - at a cost to that State - a rebate on personal income tax to its own residents.

No one would be surprised to learn that no State has taken up the option of imposing its own separate income tax.

The reality has been that none has been prepared to risk the political odium of doing so.

To all intents and purposes 'New Federalism' was dead long ago.

However, recently the Federal Opposition has taken steps to revive it.

Two months ago the then Shadow Finance Minister - in remarks consistent with the policy outlined in the Opposition's Future Directions Manifesto - foreshadowed his intention of encouraging the States to impose their own income taxes.

In the event, he was over-ruled by the former Leader of the Opposition.

However, given recent changes in the Opposition's leadership, the Government's determination to repeal this law has re-doubled. Already the new Opposition leader has appointed the former Finance Spokesman as acting shadow Treasurer.

From such a position it is reasonable to conclude he will return to his agenda of double income taxes.

Our concern has also been heightened by the Opposition Leader's unambiguous endorsement of the Future Directions document at his Tuesday Press Conference following his election.

That endorsement leaves up in the air the former Opposition Leader's repudiation of the double taxing proposal incorporated in that document.

Mr Acting Speaker, this Government is determined to remove this legislation from the statute books to ensure that no backdoor method be left which would enable a future administration to impose a second layer of personal income tax upon the people of Australia.

If any future Government wishes to pursue this course it will now have to do it out in the open - not by reactiving a relic of the Fraser years We are strongly of the view that far from being a step toward more responsible Government, States' income tax powers would instead threaten the entire thrust of macroeconomic reform in recent years.

This Government has already made enormous progress in cutting back Government spending and reducing the size of the public sector.

Commonwealth outlays as a proportion of GDP have been reduced from more than 30 per cent of GDP in 1984-85 to about 25 per cent this financial year.

Further reductions in the outlays ratio are already cemented into place for future years.

The forward estimates show that by 1991-92 Commonwealth outlays will have fallen to 23 1/2 per cent of GDP - or in terms comparable with the period before basic health cover was switched from the private to the public sectors - a ratio of 22 1/2 per cent.

This represents a significant turnaround from the trend of the 1970s and early 1980s when the Government sector claimed an ever increasing share of national income.

What-is-more, this declining share of Government outlays has paved the way for the real tax cuts.

Honourable Members will be aware that this is the first Australian Government ever to have paid tax cuts from a Budget surplus. All our predecessors have paid tax cuts by borrowing more money.

We have paid for them by cutting outlays in real terms.

Compare that to the Coalition Government which in 1982 ran up a $9.6 Billion Budget deficit after paying irresponsible, unfunded tax cuts.

In contrast this Government in 1989 has found room for responsible tax cuts of $4.9 Billion while retaining a Budget surplus of at least $5.5 Billion.

We have paid for tax cuts by cutting and better targetting Government spending and delivering the proceeds back to the community.

In the years ahead - as the ratio of Commonwealth spending to the size of the economy continues to fall - likewise the amount of revenue needed to finance that spending will also fall.

In other words, as economic conditions allow, there will be continued scope for further affordable personal income tax cuts.

It is a simple equation, never understood by the Liberals.

Lower Government spending equals lower Government taxes.

Far from being a step towards smaller Government, the Opposition's proposal to give the States greater taxing powers would put all that achievement at risk.

Handing the States taxing powers would merely provide them with the wherewithal to fund increased expenditures, claiming back to the public sector the area vacated by the Commonwealth.

Australia just cannot risk leaving this act on the books.

Mr Acting Speaker, the double taxing legislation we are repealing was in fact the second part of the Fraser Government's 'New Federalism' policy.

The first part was equally misconceived.

Introduced in 1976, it provided for the States to receive as general revenue assistance a designated proportion of Commonwealth tax revenue, initially-a certain share of income tax revenue, but from 1982-83 to 1984-85, a smaller share of total Commonwealth tax revenue.

In fact, these tax sharing arrangements were topped up by various funding 'guarantees', such that in every year but 1982-83, the States received more than their fixed share of taxation revenues. From an economic policy-making perspective, the main fault in these arrangements was that as grants were linked to revenue collections in the previous year, no account was taken of the emerging budget and economic position in the current year.

In other words, flexibility to adjust fiscal policy settings in the national interest was severely constrained.

For a relatively small country such as Australia - heavily dependent on often rapidly changing international circumstances for our economic well-being - this was a risky situation in which to place ourselves.

The Commonwealth must be in a position to act decisively and with substantial influence if it is to fulfill its macroeconomic responsibilities.

So called 'New Federalism' denied the Commonwealth that ability.

The Hawke Government acted to remove the shackles of 'New Federalism' by replacing the tax sharing grants with financial assistance grants in 1985-86.

Our aim has been to bring the growth in assistance to the States back under control and to help reduce the growth in public spending.

The States, of course, have resisted the large and sustained reductions in general purpose payments that the Commonwealth has imposed.

Similarly, I expect they will complain when, as I foreshadowed in the April Statement, we maintain that restraint at the 1989 Premiers' Conference.

But the ritual complaints of State Premiers have worn thin.

They too must play their part in economic adjustment.

Mr Acting Speaker, there is no debate about the crucial need for continued public sector spending restraint.

Reduced public sector spending makes an important contribution to providing scope for the increased private sector investment in new export and import replacing industries that is now taking place.

Of course, the need for all levels of Government in Australia to play their role in this has been made all the more urgent by the recent deterioration in Australia's external accounts.

It needs clearly to be understood by everyone in our community that each month's balance of payments figure is not a statistic in isolation. To the contrary, each month's figure amounts to a further loss on our external accounts which must be covered by borrowing.

In other words, each month's figures adds more to our external debt and to our national interest Bill.

Frankly, Australia just cannot afford to go on accumulating debt at the rate it is at present.

We simply cannot afford the luxury of different levels of Government squabbling about how to divide up a pool of revenue when the overwhelming economic requirement is that all Governments recognise the need to keep their financial demands in check.

Australia's future economic security demands that we have the full support of the States in this endeavor.

This year, more than in any other recent period, strong economic growth has ensured that the States have the financial capacity to do this.

The States have had a revenue bonanza in recent years because very strong growth in stamp duty revenue generated by the share market and property market booms has added enormously to their revenues.

State stamp duty revenue alone last year rose by over 50 per cent.

In recent years State finances have also benefitted considerably from the Commonwealth's Accord with the trade union movement.

Since wage costs represent a major proportion of the States' costs in providing services such as education, health and police, wage restraint flowing from the accord has helped increase the effective level of resources at the disposal of the States.

In view of these trends in the States' finances, it has been essential for the Commonwealth to significantly cut payments to the States to encourage then to restrain their spending.

In the past the States have simply spent all the revenue that has come their way.

Not to have cut back on Commonwealth payments to the States in current circumstances would have been economically irresponsible.

The alternative would have been to allow the States to increase their own outlays, offsetting the Commonwealth's spending reductions. Mr Acting Speaker, some States seek to confuse this issue by producing a plethora of statistics comparing growth rates in outlays and revenue.

Their favourite is to complain that the cuts in Commonwealth payments have exceeded the cuts in the Commonwealth's own outlays and that they are therefore bearing an unfair share of the burden of fiscal restraint.

Such comparisons are simply irrelevant.

The fact is that if the Commonwealth had not cuts grants by the degree it has it is likely the States would have shown no spending restraint at all.

The most appropriate measure of the relative fiscal restraint of the Commonwealth and the States is growth in each sector's own purpose outlays.

In other words, comparing apples with apples.

On this basis, since 1986-87 Commonwealth own purpose general government outlays - that is, excluding public trading enterprises such as Telecom and Qantas - have fallen by 5 per cent in real terms.

On the other hand, and despite the cuts in Commonwealth payments, comparable State outlays have increased by around 2 per cent in real terms.

This growth reflects, in part, the continued strong growth in the States' current expenditures on goods and services.

These grew by nearly 4 1/2 per cent in real terms in 1987-88, and look set to grow at about the same rate this year.

None of this is to suggest that the Commonwealth is seeking to impose draconian spending cuts on the States.

We fully recognise that public services must be adequately funded.

But by the same token, by cutting out waste and inefficiency and better targetting assistance, there is further scope for the States to curtail spending.

They must continue to make a contribution to national economic adjustment in proportion to their importance in the economy.

Mr Acting Speaker, I turn now from expenditure and taxation to policies toward government borrowing, where it has also been necessary for the Government to diverge sharply from the policies of the previous government so as to restore order in national public finances. When the Fraser government came to office, borrowings by State authorities were effectively controlled by Loan Council, under what was known as the Gentlemen's Agreement dating from 1936. These arrangements were allowed to fall into severe disrepair by the Fraser Government.

Indeed, at times State authorities were encouraged to increase their borrowings, including from overseas.

These increased borrowings were purportedly to be used to fund infrastructure for the much touted resources boom of the early 1980s.

However, they also enabled some States to squirrel away substantial cash balances which they could later spend, thwarting national fiscal policy objectives.

Proper oversight of public sector borrowing under the Liberals was weakened in three ways:

Loan Council failed to extend its oversight under the Gentlemen's Agreement to new, "Non-Conventional" forms of borrowing such as financial leases and deferred payment schemes;

from 1977-78, Loan Council agreed to a wave of special additions to State authority borrowing programs for major infrastructure projects; and from 1982-83, all domestic borrowings by State electricity authorities were excluded from control.

By 1983-84, over 75 per cent of State authority borrowings were outside Loan Council control, and the net PSBR of the State and Local sector had grown from 1.7 per cent of GDP at the end of the 1970s, to 2.9 per cent of GDP in 1982-83, the highest level since the 1950s.

Mr Acting Speaker, while there was much worthwhile public sector capital investment in the early 1980s, there was a significant component that could not be properly justified on any reasonable basis.

Further, the concentration of infrastructure spending in that period added enormously to our foreign debt burden and contributed to the wages blow out and high inflation that marked the period.

The present government, when it came to office, was faced with the task of re-establishing national control over the net PSBR through Loan Council.

Accordingly Loan Council's acceptance from 1984-85 of the global approach to authority borrowings was secured. This approach reasserted Loan Council's responsibility for control over all forms of financing by Governments at all levels.

In the early period the global limits did not bite as much as they should have because of the cushion left from the Fraser mismanagement of borrowings.

Increasingly, however, the global limits have become a useful tool of fiscal responsibility.

Even so, the States' net borrowing requirement has only declined from 2.3 per cent of GDP in 1983-84, to an estimated 1.2 per cent in 1988-89.

In the same period the Commonwealth Government's net borrowing requirement has been cut from a 4.5 per cent deficit to a surplus of 0.9 per cent.

Mr Acting Speaker, the stablisation policy issues I have raised serve to highlight the role the States have to play in improving Australia's economic performance.

But just as the States can impact - for the better or worse \-on broader fiscal policy settings, so they can have an important part in either promoting or frustrating necessary structural reforms.

Regrettably the States are frequently to be found dragging their feet when it comes to structural reform.

Each State's financial position is affected by the expenditure consequences of its infrastructure and industry policies.

It is no use the States crying poor while, at the same time, their profligacy is revealed in continuing explicit or implicit industry subsidies and by sub-economic pricing of key resources, such as for out-moded rail services.

Mr Acting Speaker, for its part the Commonwealth has matched its success in fiscal management with a broad ranging program of microeconomic reform.

We demonstrated our determination to progress in this area by overiding restrictive State provisions in order to accelerate the essential deregulation of wheat transport and marketing.

Earlier this week, further reforms in the area of science and technology were announced, while later this month a major statement will be made on coastal shipping and the waterfront.

But we have to recognise that many of the structural rigidities and impediments to growth are rooted in State practices - particularly in the important area of transport. It is crucial to the objective of improving waterfront efficiency that State port authorities reduce their costs, charge economically sensible prices for their services and become more active in,encouraging competition within ports.

Where States have taken steps towards reform they need to be rigorously followed through.

Most States have not even begun the reform process - they need to lift their game.

The State railways are another area crying out for reform.

They largely account for State enterprise subsidies of some $203 billion per annum.

In the skies Commonwealth deregulation of domestic trunk passenger aviation will begin in 1990, and the hard but correct decision was taken on the third runway at Sydney Airport.

But most States seem reluctant to give up their detailed regulation of intrastate air services, even though this will frustrate the full benefits for customers of the Commonwealth's initiative.

Mr Acting Speaker, it is also important that progress made by the Commonwealth towards a stronger industry structure is not dissipated by inappropriate State policies.

There is a complex web of State incentives, taxes or charges and unnecessary and inconsistent regulation within and between States.

Regrettably, one area where our Federal system has been all too productive is in the generation of unnecessary regulations: packaging and labelling regulations, occupational licensing, and the disparate regulation of companies and the securities and futures industries are cases in point.

Mr Acting Speaker we look to the States to play their part in helping to remove such impediments and structural rigidities.

It is for all these reasons, Mr Acting Speaker, that we repeal the last relic of the Liberal Party's new federalism.

I present the Explanatory Memorandum, which contains an explanation of the provisions of this Bill.

I commend the Bill to the House.