Lazarus Rising
Page 38
Ken Asprey QC, who headed the inquiry, reported in 1975 at a time when the Whitlam Government had entered its death throes. Essentially, he said that Australia relied far too heavily on personal income tax as a source of revenue, should introduce a broad-based value-added tax, reduce personal income tax rates, embrace a capital gains tax and make sundry other changes.
Whilst many people might have argued on the detail, Asprey’s main recommendations made sense. Australia had high rates of personal income tax, and over the years the point at which the top marginal rate of tax applied had become progressively lower. In 1955 it cut in at approximately 19 times average weekly earnings. By 1975 this had fallen to 5.5 times average weekly earnings. By the middle of the 1980s it had fallen to 1.8 times. In the 1970s and ’80s, the double-taxation curse was the impact of a progressive personal income tax system at a time of continuing high levels of inflation, which repeatedly pushed taxpayers into higher tax-paying brackets.
One of the first things I did as Treasurer was to take legislation through federal parliament abolishing all federal death duties. It followed the abolition of such duties in Queensland. Other states followed suit, and before long Australia was a death-and gift-duty-free country. This was a big and popular reform, but further narrowed the tax base, serving to highlight yet again the need for comprehensive tax reform.
The Fightback! experience had left the Liberal and National parties very gun shy when it came to fundamental taxation reform of the type which so many knew was needed: the introduction of a broad-based indirect tax coupled with significant reductions in personal income tax.
After the defeat of the Coalition in 1993, we accepted that the Australian people, having voted to return Paul Keating, had wanted major tax reform taken off the agenda at least for the time being. We had no plans to introduce an indirect tax during our first term in government. In 1995, I had used the strong language of ‘never ever’ to kill off the goods and services tax (GST) as an issue for the coming election. We had no secret plans for a GST and I knew that if that were to ever change I would need a specific mandate to bring it about.
That is where the matter rested for some two years. Despite the appallingly large debt the Keating Government had left behind, the Coalition had not drifted back to the idea that a solution would lie in having a GST. For myself, I had never intellectually abandoned the belief that Australia needed basic taxation reform and I knew that this, if it were to occur, would have to include the introduction of a broad-based indirect, or goods and services tax. I had watched the changes in New Zealand and earlier in the United Kingdom, and did not imagine that Australia could, indefinitely, remain as heavily reliant on personal income tax as a source of revenue.
There were also the imbalances in the Commonwealth–state financial relationship. Every federal government had grappled with this. It was no different for us. Despite there being only one Labor Government at a state and territory level when I became Prime Minister, it was not long before the states began to blame their financial woes on the Commonwealth.
As 1997 progressed, it became clear that the Government, for a variety of reasons, had lost momentum. Part of the problem had been the expectations created by the cracking pace of our early months. In less than a year we had begun implementing our plan to bring the budget back into balance; had delivered on our family tax promises; had implemented major workplace relations reforms; had revolutionised the approach to helping Australians find a job; had privatised one-third of Telstra and established the NHT and had also moved in many other areas to implement non-economic commitments.
Still, the sense was that despite all of this, given the huge majority we had, still more should be undertaken. I did not need a lot of persuading that the Government had to maintain the momentum of reform otherwise the public would begin to become restless. Having spent so many years of frustration in opposition, it was not my natural condition to remain on idle in government.
At the time of the 1997 budget, I had some general discussions with Tim Fischer and Peter Costello about the need for tax reform. Shortly after that budget, I said on the Sunday morning Channel 7 program Face to Face that the issue of fundamental taxation reform would have to be addressed at some time. I reaffirmed our commitment regarding a GST during our first term in office, and although I did not specifically allude to a GST being introduced at a later date, the possibility was left open, by implication. I had put my toe in the water and my comments attracted considerable media interest.
It took a bout of viral pneumonia which hospitalised me for a week in the excellent facilities of the Mater Private Hospital in Crows’ Nest in Sydney, and a further convalescence of two weeks at Kirribilli House, to really crystallise my thinking on the issue of taxation reform. When I returned to work in July of 1997, I called a cabinet meeting to discuss the issue. By then the speculation had grown and my colleagues were anything but unprepared for the discussion. I had worked out in my own mind some principles which would govern our approach. I presented them to my colleagues for discussion and endorsement. They were:
There should be no increase in the overall tax burden
Any new taxation system should involve major reductions in personal income tax, with special regard for the taxation treatment of families
Consideration should be given to a broad-based indirect tax to replace some or all of the existing indirect taxes
There should be appropriate compensation for those deserving of special consideration
Reform of Commonwealth–state financial relations must be addressed.
It was clear from these principles where our reform plan was headed. Prior to making a public announcement I convened a telephone hook-up of the chairmen of all of the Coalition backbench policy committees to seek their reaction to and approval of the announcement being made without a special party meeting. There was overwhelming support for the approach that we were taking. I also telephoned all of the state premiers to inform them of the planned reform. I announced the Government’s intentions on 13 August 1997.
Taxation reform was a large piece of unfinished economic business for our country. It was something that I had believed in for a long time, and I felt enthusiastic that we were now going down a difficult but most desirable path towards further strengthening our economy. Some journalists, in particular Michelle Grattan of the Melbourne Age, poked fun at my reference to tax reform being a ‘great adventure’. Perhaps it was a strangely colourful phrase for something as drear as taxation reform, but using the expression illustrated my strong commitment to what we hoped to achieve.
I was again doing what I relished most in politics: campaigning for a much-needed reform.
I said that any changes would not take effect until after the next election and, as a consequence, any major taxation alterations would be the centrepiece of the economic debate in the next election campaign. This rendered nonsensical those arguments from the Labor Party that I was being dishonourable in advocating taxation reform when I had previously ruled out a GST. Those critics conveniently overlooked the fact that I was giving the electorate the opportunity to reject the Government if it did not like our taxation proposals. Surely a political party is entitled to change its position on a major policy issue without being accused of bad faith, if it submits the change for adjudication at an election?
Debate on taxation reform had occurred fitfully in Australia over some 15 to 20 years. It was not a new issue. Experience had told me, however, that if ever it were going to be achieved, it had to be delivered by an incumbent government, in a strong political position and in the early stages of its time in office. The Howard Government in 1997 met those criteria.
The enthusiasm of the backbench for taxation reform gave me great heart. Marginal seat-holders realised that the 1998 election had to be fought on different issues from those in 1996. They saw taxation reform as a cause to fight for, something positive to advocate for the future benefit of the country.
As Treasurer,
Peter Costello assumed the daily burden of putting together a detailed proposal for taxation reform. He did an outstanding job. A taxation taskforce was established headed by Treasury, with representatives from my department, the Australian Taxation Office, the Treasurer’s office and the Cabinet Policy Unit. We conferred regularly about the shape of the reform. As weeks turned to months, Costello successively brought to cabinet Powerpoint presentations on various aspects of the reform plan.
There was not much doubt from the beginning that the rate for the GST would be 10 per cent. Both Peter and I felt that 15 per cent, which had been the Fightback! level, was too high and that anything less than 10 per cent would immediately invite the suspicion that it would be increased to 10 per cent not long after its introduction. We both wanted a rate which remained unchanged indefinitely.
Peter Costello and I were also keen that as many as possible of other indirect taxes at both a state and federal level should be removed. First and foremost was the removal of the antiquated and inequitable wholesale sales tax, which applied to a limited number of goods, did not apply to services and heavily discriminated against manufacturers and exporters. There should also be a major revamping of the business taxation system. Good preparatory work with the business community meant that credible figures such as John Ralph, later Commonwealth Bank chairman, were active in promoting reform. He and others would raise the money to fund television advertisements which strongly put the case for taxation reform when the detailed plan was released almost a year later.
Ralph and his colleagues had also reached out to welfare groups and, although the policy when released was not applauded by those groups, it was not completely condemned. We had learned from the mistakes of the past. In putting together the policy details, the Government went to great lengths to cushion the impact on low-income people. The compensation arrangements for pensioners initially were fair, and they were made more generous in the course of later negotiations with minor parties and Independents in the Senate.
A critical point was reached in decisions on the personal income tax rates, when cabinet agreed to the abolition of the tax rebate on savings, introduced only a year earlier, and the use of the proceeds of that decision to fund a tax rate of 30 per cent for some 80 per cent of taxpayers. To be able to say that 80 per cent of taxpayers would pay no more than 30 cents in the dollar on their last dollar of income became a powerful selling point for the policy when it was released.
Late in the preparation of the final tax plan, I asked that a rate of 7.5 per cent, rather than 10 per cent, be examined. When something as complex as this huge reform is under consideration, all manner of options are looked at. After putting the proposition to Peter Costello and his obtaining advice on it, I did not pursue it any further. It was no more than an option I wanted examined. Peter and I worked together in close professional association in preparing the plan for a new tax system. We both believed in it and we both had a lot at stake in ensuring that the right outcome was achieved. He impressed with his technical mastery of the subject.
The final plan was huge in its scope. It involved the introduction of the 10 per cent GST with only minimal exemptions for such things as health and childcare services. It covered food and stipulated that all of the proceeds of the GST would be funnelled to the states. In this fashion it became also a major structural reform to Commonwealth–state financial relations. The states now had the growth tax they had long craved. In return for obtaining the proceeds of the GST, the states agreed to abolish a large number, but not all, of their own taxes such as the bank account debits tax, the financial institutions duty and stamp duty on share transactions. The wholesale sales tax was to be abolished. Payroll tax was left untouched, which was unfortunate, but to abolish it would have meant a GST rate of at least 12.5 per cent. Major changes to business taxation were also canvassed, including a reduction in the corporate rate to 30 per cent. This reduction became part of the Government’s overall tax reform program.
At my insistence it was also agreed that we would introduce a 30 per cent tax rebate for private health insurance. The earlier means-tested and more limited tax rebate had not worked, and I was concerned that unless we went the extra distance, private health insurance would continue to languish.
There were also major changes to the Family Tax Benefit arrangements. We combined a number of payments, including the family allowance and the family tax initiative, and in their updated versions they became Family Tax Benefit A, which went to all eligible families with children under 16, and Family Tax Benefit B, which in addition went to single-income families.
Released on 13 August 1998, A New Tax System (ANTS) was a sweeping reform. We laid out all of the details, including tax rates and cameos for different income groups. I knew at the time that it would be the basis of our re-election pitch, and that subject to a reasonably satisfactory launch, I would call an election within a matter of weeks. The launch received a very positive reaction from commentators and the media generally. The Labor Party came out strongly against it, and the Australian Democrats, whilst expressing broad support for tax reform, including the introduction of a GST, opposed the GST applying to food. Crucially Senator Harradine was noncommittal.
There seemed no point in delaying the election, as the battlelines had been drawn. After watching the Wallabies complete a clean sweep against the All Blacks for the Bledisloe Cup on the Saturday night, I flew to Canberra on Sunday, 30 August, and called the election for 3 October 1998. We were provoking the gods — going to an election promising a new tax. Many thought that we were crazy. One was Kerry Packer, who just a few weeks before the release of the tax plan had rung me to say that a GST was a totally stupid idea. He said that no amount of personal tax cuts would mollify the public, which would resent paying a new tax. We were behind in the polls, and the ALP would run a populist scare campaign. It was so ‘courageous’ it would have made Sir Humphrey proud.
The election campaign was overwhelmingly dominated by debate on our taxation reform plan. Campaigning for a detailed taxation policy with all of the minute impacts on individuals having been spelled out was a hazardous undertaking. Both Peter Costello and I lived with the daily fear that, no matter how well prepared we might be, we would stumble on some small technicality which would be blown out of all proportion in the hothouse of the campaign. Both of us remained haunted by the birthday cake experience of John Hewson in 1993. Although there were some glitches, we managed to avoid major stumbles and emerge from the campaign with the details of the tax plan holding together extremely well. Peter Costello and his department had done a superb job in delivering a plan which was bulletproof. For something as complicated as taxation reform that was a notable achievement.
There was no way that we were going to preserve our 1996 majority. The polls remained against us throughout the campaign, but with such a big majority it seemed inconceivable that the Labor Party could make us a one-term government. Yet the final Newspoll, released the day before the election, showed a two-party-preferred vote for the ALP of 53 per cent against 47 per cent for the Coalition. If repeated on election day, that would produce a catastrophic outcome for me and my colleagues. In the space of just under three years, a thumping majority of 45 seats would have evaporated in the face of a Labor Party which had not even attempted the process of renewal and reconstruction following the rout of March 1996. As I hosted a thank you dinner for my staff at the Stamford Plaza Hotel in North Ryde, I tried to boost their spirits by saying we had been a reformist government which had courageously taken political risks to give Australia a better future. I felt very nervous.
I respected Beazley. He had done a good job as Opposition Leader, representing experience and continuity. His colleagues liked him, and he had the right personality to hold the party together immediately after a big defeat. He had been Keating’s Deputy Prime Minister but escaped much of the odium attached to my predecessor. His knowledge of foreign affairs and defence meant that he could speak with authority i
n these areas. All up, he gave the ALP immediate respectability in opposition and, because of his experience, the capacity to look and sound that the Labor Party, after a very short time in opposition, was once again ready for government.
That appearance hid a deeper reality. Any party which suffers the kind of defeat that the Labor Party did in 1996 needs a thorough examination so that the reasons are fully understood. Labor never engaged in this exercise and was seduced by some of the easy pickings of early opposition, such as the problems we encountered following the Wik decision, ministerial resignations over non-compliance with the conduct code and, most importantly, knee-jerk reaction to the GST, which led the Labor Party to believe that we had potentially committed political suicide by embracing it.
The real gift to the Labor Party, which ultimately proved quite illusory and would lead it to a complacent second term in opposition, was Pauline Hanson and One Nation. As well as the GST, Pauline Hanson and One Nation contributed significantly to our big loss of seats in 1998.
Election day 1998 was extremely tense for me. Pre-election polling had been very bad. As always, I toured Bennelong polling booths. I met the Unity Party candidate, who was of Chinese descent, who tackled me on a variety of subjects. He said my stance on Pauline Hanson meant that I was unsympathetic to citizens of Asian background. Labor workers were buoyant, believing that I was facing humiliating rejection.
At Gladesville Public School I shook hands with a One Nation helper who wished me luck and told me that he had always voted for me in Bennelong. I enquired why, therefore, he was handing out tickets for Pauline Hanson, to which he replied that he had been attracted to some of her views but nonetheless hoped that I would be returned as Prime Minister. I then asked him to give his preference vote in Bennelong to me ahead of the Labor candidate, and in defiance of the preference clearly shown for the Labor Party on the One Nation how-to-vote ticket. His reply was a rather lame comment that he really had to follow the preference advice of his party. This man’s attitude exemplified why we lost more ground in the 1998 election than might otherwise have been expected.