The economy, taxation and financial policy
Both Fraser and Hawke faced major budget problems. As the 1982 budget was being shaped Treasurer John Howard urged his colleagues to attack the deficit by reducing outlays, severely restricting public sector borrowing and if necessary raising indirect taxes. Unemployment had risen from 5.6 per cent in May 1981 to 6.6 per cent in May 1982 and would reach 10.3 per cent by May 1983. Many of Australia’s problems flowed from the prolonged international recession, but they were exacerbated by a major wages breakout in the second half of 1981 and an inflation rate of over 10 per cent. Interest rates were at very high levels, partly because of strong public sector borrowing, and consumer spending and business investment had stalled. Treasury recommended a 1982–83 budget deficit of no more than $500 million, Howard was prepared to go as high as $1.5 billion and the final figure was $1.67 billion. This was seen as a significant policy split between Fraser and Treasury. The Tax Office suggested that a 10 per cent services tax in areas such as entertainment, short-term accommodation, personal services, and motor vehicle repairs could raise $400 million per year. Cabinet decided to raise about one quarter of that amount by extending sales tax in areas such as travel literature, films, equipment repairs, clothing and furnishings. The budget also reduced the standard tax rate to 30 per cent, increased family allowances and provided a tax rebate for interest payments on mortgages of up to $60,000.
Unfortunately the 1982–83 deficit proved to be far worse than predicted, as the cost of unemployment benefits and drought relief rose and tax revenue fell. As soon as the Hawke Government took office Treasurer Paul Keating and Finance Minister John Dawkins unleashed a barrage of bad news on Cabinet. The estimated 1982–83 deficit was now close to $4.4 billion, while the preliminary estimate for 1983-84 was $8.9 billion on the basis of existing policies and around $12 billion if the ALP’s election promises were added to it. The economy was in deep recession and unemployment was still rising, although more slowly than in 1982.
In July 1983 Keating convinced Cabinet that the 1983-84 deficit should be no more than $8.5 billion and the budget brought down on 23 August predicted a deficit of $8.3 billion. The budget realised one of the ALP’s main election commitments by establishing Medicare from February 1984. Funded in part by a 1 per cent tax levy, Medicare would provide free basic public hospital services and refund 85 per cent of scheduled doctors’ fees, with a maximum patient contribution of $10 per service.
Keating canvassed new sources of revenue, although, as his predecessor had found, this was difficult territory. Cabinet rejected proposals to increase taxes on tobacco, wine and cider, introduce a 7.5 per cent service tax on entertainment, short-term accommodation and personal services and to remove the tax exemption on gold mining, which had been introduced as a temporary relief measure in 1924. However Cabinet did agree to index excise rates on beer, spirits, tobacco and petroleum products to the inflation rate, so that collections at least maintained their real value. Keating also removed tax concessions for land clearing and swamp drainage and Cabinet agreed in principle to a resource rent tax on oil and gas, initially replacing existing taxes, but with the expectation of revenue gains from new fields. The budget speech also foreshadowed the introduction of a pensions assets test. The pensioner’s home, car, caravan, boat and household effects would be exempt, but most other assets would be assessed at a deemed earnings rate of 10 per cent.
The Fraser Government devoted a great deal of its last months in office to the political and legal problems of large-scale tax evasion. Tax evasion through the stripping of company assets had become a major issue in the 1970s, giving rise to the intriguingly-named Wet Slutzkin (where a company was stripped of untaxed profits and) and Dry Slutzkin (where company tax was paid but personal tax avoided) schemes. In many cases the companies’ records were then conveniently lost, or, in the parlance of the day, ‘sent to the bottom of the harbour’. The Commonwealth had attempted to fight the schemes but had been hindered by a less than sympathetic High Court and a less than stellar performance by some areas of the bureaucracy. In addition there was an uncertain boundary between legal tax ‘avoidance’ and illegal tax 'evasion' and a widespread dislike of the use of retrospective legislation to plug holes in the tax regime.
John Howard told Cabinet in June 1982 that Part IVA of the Income Tax Assessment Act, which had come into effect in May 1981, had largely stopped blatant avoidance schemes by requiring vendor-shareholders to pay tax on stripped company profits. There remained a problem with income from family trusts being siphoned to people beyond the reach of taxation. This would take a long time to resolve through the courts, leaving some wealthy families free of tax for years. Howard therefore announced on 25 July 1982 that further legislation would be introduced to combat blatant, contrived or artificial tax avoidance schemes, with effect from the date of the announcement. However the use of retrospective legislation attracted vigorous opposition, some of it from sections of the Coalition parties. The Fraser Government did succeed in passing legislation to recover company tax evaded in Wet Slutzkin schemes up to 1980 and the Hawke Government made five unsuccessful attempts to pass legislation to recover personal income tax evaded through Dry Slutzkins.
The Fraser Cabinet gradually addressed some of the recommendations of the Campbell report on the Australian financial system. In July 1982 Cabinet expressed a disposition to allow a limited number of foreign banks to trade in Australia, but called for further information on the selection process, licensing conditions and the profitability of Australian banks. In January 1983 it was decided to announce that in principle the government would permit the entry of up to 10 foreign banks. They would be required to operate through Australian subsidiaries, desirably have 50 per cent Australian equity, meet the same prudential standards as Australian banks and provide a wide range of services with a reasonable branch network. The Hawke Government confirmed the introduction of foreign banks in 1984.
