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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

27 March 2011

NO.010

Treasurer's Economic Note

Today's economic note follows the release of yet more research into the best ways to tackle climate change. The reports were varied in their focus, with one analysing the best way to compare international action, another looking at the need for innovation and research into new green technologies, and a third assessing the best way to reduce domestic emissions. But what is becoming increasingly clear from the economic literature is that we need to put a price on carbon to drive the necessary transformation to a clean-energy economy. The introduction of a carbon price through a market mechanism will encourage businesses to move to less-polluting practices, reducing costs in the long term, and it will also help keep our industries at the cutting edge of new technologies. Just like the key economic reforms of the 1980s – such as the floating of the dollar and tearing down the tariff wall – carbon pricing will remove market distortions and help ensure our economy is oriented to the jobs of the future. It's inconceivable to imagine an Australia in which the fundamental reforms of the Hawke-Keating Government hadn't taken place, and yet there were opponents at the time who said the sky would fall in. In 20 years time, people will look back on the carbon price debate in just the same way, and wonder again how the opponents could have got it so wrong.

Carbon Price

The first climate change report released during the week was the Productivity Commission's methodology working paper for its review comparing carbon policies in different countries. The Commission is looking at climate policies in the UK, USA, Germany, New Zealand, China, India, Japan and South Korea, and will focus on policies that penalise the consumption of high-emissions products as well as policies that encourage the production of low-emissions products. This is complex and difficult work, but it will provide a valuable insight into the action that is being taken around the world to tackle climate change.

The second report was an updated paper by Professor Ross Garnaut that deals with the opportunities for investment in innovation to reduce the cost of transforming our economy. It notes that Australia's policy on research, development, demonstration and commercialisation has evolved in productive ways since the 2008 review, with the Government boosting support for low-emissions electricity, and in the process of legislating improvements to support for R&D through the tax system.

We also received an insight into new research by the Grattan Institute that assesses the cost of different approaches to cutting carbon emissions. The report won't be released until early April, but the big message according to the Grattan Institute's John Daley is that market-based measures are the only way to get enough reductions to hit our targets and do so at a reasonable price.

On the Government side of things, we are continuing our tireless consultations with stakeholders on the design of the carbon pricing mechanism. The Business Roundtable on Climate Change, which includes business leaders from right across the economy, has already met twice. On Wednesday, Climate Change Minister Greg Combet and I announced the establishment of two separate sub-groups within the Business Roundtable – one to examine issues around transitional support for business in more detail, and another to look at specific issues in the energy sector. There is a broad coalition of support for putting a price on carbon, and we're going to keep engaging with anyone who comes to the table in good faith. I can only commend those businesses who understand the importance of getting this crucial economic reform right.

Tax Reform

The Minerals Resource Rent Tax (MRRT) is another of our big-ticket reforms that has been the subject of tireless consultations. When we reached our breakthrough agreement with the mining industry in July of last year, we immediately established a Policy Transition Group to consult with the resources sector and other stakeholders on the details of the MRRT's design. On Thursday, Resources and Energy Minister Martin Ferguson and I announced that the Government has accepted all 98 of the Group's recommendations, including the setting up of a Resource Tax Implementation Group to continue consultations as the legislation is drafted. The extensive consultation process will continue further when the draft legislation is released for public comment later this year.

As consultations with businesses and the broader community on our MRRT and carbon pricing mechanism continue, it's encouraging to see the continued strength of investor confidence as reported in the business pages of the papers. Just yesterday, there was reporting of BHP Billiton's US$9.5 billion expansion of its iron ore and coal mining operations, and an article in the Australian Financial Review about foreign investors investing in Australia at the fastest rate in more than a year, as purchases of equities by overseas buyers doubled in the last three months of 2010.

The MRRT is just one of the items on a big list of tax reforms to be implemented over the next couple of years, with the bulk of these to come into effect on 1 July 2012. For individuals, there's the phase-in of the new optional standard deduction to make tax time simpler and increase tax returns for up to 6.4 million Australians, as well as the phase-in of the new 50 per cent tax discount on interest income. For small businesses, there's the head-start in the cut to the company tax rate to 29 per cent, and the introduction of the instant asset write-off that will allow small businesses to write-off any new asset worth up to $5,000 immediately. In terms of super, there's the increase in the super contribution caps for over 50s, and the start of a new contribution of up to $500 for 3.5 million low-income earners who currently get little or no concession on their compulsory super. The biggest reform to the superannuation system since compulsory super was introduced in the early '90s will kick in on 1 July 2013, when we start to progressively increase the super guarantee from 9 per cent to 12 per cent. That's also the start date for the cut to the company tax rate to 29 per cent for all companies.

When you add these reforms to the ones we put in place during our first term in government – like the $47 billion worth of tax cuts, the introduction of the Education Tax Refund, increasing the Child Care Rebate to 50 per cent, and reforming the pension system – you really get a sense of the scale of our reforms in the tax and transfer space since coming to government.

When I released the tax review's report and announced our substantial package of tax reforms in May last year, I said that these were the first steps in a long-term process. We saw this in action later in the year, when the Government announced a number of election commitments that further drew on the tax review's recommendations. They included increasing the Family Tax Benefit Part A payment for 16 to 18 year olds, to recognise that children don't cost less as they get older, along with reforms to the governance of the tax system and improvements to the regulation of the not-for-profit sector.

I'm now calling on the whole Australian community and its representatives at the Tax Forum to help us sketch out some important plans for what we do in the years ahead. I've ruled out a small number of the tax review's recommendations in the interests of business and community certainty, but I want participants and the general public to feel free to raise whatever issues they like in the lead up to and at the forum. The most important thing about the Tax Forum is that we draw out all the different views within the community about our tax and transfer system, to guide us as we continue to respond to the opportunities and challenges of mining boom mark II.

Banking Reforms

Another area of ongoing reform has been our actions to boost competition in the banking system. In December I announced a comprehensive package that builds on our existing measures by empowering consumers, supporting smaller lenders, and securing the long-term flow of credit to our economy. Following developments in the Parliament last week, I can confirm that we're delivering these reforms right on schedule.

First up, our ban on mortgage exit fees passed into law on Wednesday, and will apply to all new home loans from 1 July 2011. This was an important day for consumers because it means the removal of one of the biggest roadblocks stopping families from walking down the street to get a better deal. Then on Thursday, I introduced our bill to crack down on anti-competitive price signalling between banks that is designed to undermine competition and allow them to raise their mortgage rates without competitors undercutting them. I also introduced a bill to deliver on our election commitment to crack down on the unfair treatment of Australians with credit cards, and stamp out lender practices which see consumers pay more interest than they should. Credit cards are such an integral part of the family budget these days, and these reforms are all about ensuring that every dollar of a borrower's hard-earned repayments work hard for them.

Coming Up

As budget preparations continue unabated in the lead-up to the second Tuesday in May, I took the opportunity on Wednesday to make a ministerial statement to Parliament on the impact of the recent natural disasters on the economy and the budget. The latest estimates are that the January floods and Cyclone Yasi will reduce economic growth by around ½ percentage point this financial year. Around two-thirds of the rebuilding and recovery costs will be funded through budget savings, with the remainder to be funded through our temporary flood and cyclone levy which passed through the Senate on Tuesday. I explained in my ministerial statement that the rebuilding and recovery costs will weigh on the budget estimates in the early years, and that slower growth will reduce government revenue in the short term. We saw evidence of this on Friday with the release of the Government's monthly financial statements which showed revenue collections were softer in January, underscoring the challenging circumstances we face in putting together the next Budget. Our strict fiscal rules have us on track for surplus in 2012-13, but there is no doubt the task has been made a lot harder because of the impact this summer's natural disasters will have on the budget bottom line.

Wayne Swan
Deputy Prime Minister and Treasurer of Australia
Sunday 27 March 2011

www.treasurer.gov.au