The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

26 June 2011

NO.023

Treasurer's Economic Note

One year into the Gillard Government – and in a week when the key budget bills passed through the Parliament - it's a good time to take stock of the nation's achievements: the 258,000 jobs that have been created over the past 12 months; the investments made in critical areas like skills, training, mental health and infrastructure; and how we pulled together to respond to the devastation of the floods and Cyclone Yasi. These are things all Australians can be proud of. Even in the past week, there's been plenty to be optimistic about: the important progress made on the rollout of the National Broadband Network; changes to make family tax benefits more sustainable; and the ban on exit fees on new home loans. But while it's important to note our achievements, I – like most other Australians – want to get on with the job of building a more prosperous future. The Gillard Government is determined to continue getting the fundamentals right to keep our economy strong.

Putting a Price on Pollution

One of the biggest policy challenges confronting our nation is putting a price on carbon pollution. Like the introduction of any major economic reform, it's natural some people will feel anxious about the change. We'll be announcing the final design of the scheme in the near future, but what I can say today is that generous financial help for household budgets will be provided to the vast majority of Australians. This support will be delivered through a combination of tax cuts and increases in family payments, pensions and allowances. In fact, about nine out of ten households will receive some form of help for their household budgets, and a big majority of households will get assistance that covers the average price impact of a carbon price. That means millions of low- and middle-income families will be doing their bit to protect our environment without any negative impact on their net family budgets.

Many people ask: why put a price on carbon if all the money just gets handed back again? It's a good question. A carbon price will change relative prices, making goods and services that generate more pollution relatively more expensive, and those that generate less pollution relatively cheaper. If people want to continue buying the more expensive goods and services, they will have the additional cash to do that. But if they switch to items made with lower carbon emissions at a cheaper price, they'll be able to pocket some of the additional household assistance. So if families can make a few changes at the supermarket and look for more energy savings around the house – like turning off appliances at the wall - they'll be able to pocket the extra tax cuts, family payments and pension increases and come out ahead. Families that have done a bit of this might already be making the savings, and will still get the same amount of carbon-price assistance.

We've also committed to provide assistance to trade-exposed, emissions-intensive industries. This assistance, which is the subject of continuing discussions, will be designed to support Australian jobs and help businesses prepare for the low-carbon future. The Government doesn't underestimate the pressures faced by these industries caused by the high dollar, high commodity prices and the lingering effects of the global financial crisis. In fact that's a key reason why we're cutting the company tax rate and letting all small businesses instantly write off any new asset worth less than $5,000 – to help those millions of Australian businesses that aren't in the mining boom fast lane.

Investment Pipeline

For the resources sector, the transition to the clean-energy future is happening at a time when there are high levels of profitability, with prices for some commodities, like coal, having doubled in the past few years. This trend is set to continue, with Australia's earnings from energy and minerals exports forecast to increase by 20 per cent to around $218 billion in 2011-12. Earnings from iron ore are forecast to rise 17 per cent, and by over 30 per cent for coal, gold and alumina, according to forecasts released last week by ABARES.

The Reserve Bank noted the strength of mining industry investment in its monthly board meeting minutes, which were released on Tuesday. The Board confirmed that despite the big hit to our economy from the summer's natural disasters and continuing global uncertainty, there should be a solid rebound in mining production in the June and September quarters. The nation's strong economic outlook is why the Government is so determined to get the Budget back in the black by 2012-13. Significantly, the Board endorsed the Government's fiscal stance and confirmed our strict fiscal rules are taking pressure off the economy: "fiscal policy was expected to exert a significant contractionary impulse on aggregate demand over the next two years." This comes on top of the widespread backing for the Budget's fiscal discipline from market economists, as well as big wraps from business organisations for our major skills investments, and from health professionals for our $2.2 billion mental health package. The passage of the key budget bills through the Parliament last week is a good example of how we're getting on with the things that matter for Australians: getting more people in good jobs, investing in our skills and well-being, and tackling the big challenges like dangerous climate change.

A Fairer Return on Our Mineral Wealth

We've also made important progress over the past year on the taxation of Australia's mineral wealth, with the Government this month releasing draft legislation on the Minerals Resource Rent Tax (MRRT) for public comment. As with the carbon price, the Government is having a constructive dialogue with industry on this important reform. There are however a couple of incorrect claims about the MRRT that are worth refuting. One is that the tax favours large foreign-owned companies because it gives them large transitional deductions on the value of their mines. The truth is profits are treated the same under the MRRT regardless of who owns the resource or how miners are financed. All miners can choose to value their mines at market value and deduct that over time. Larger companies are likely to have large market values on their mines because they are so profitable. This obviously means the companies will also have significant MRRT liabilities.

Another incorrect claim is that the MRRT favours larger miners because it does not provide a deduction for interest costs. This is standard for resource taxes, and is the same approach used for the Petroleum Resource Rent Tax and royalties. Some people may be confused because they are able to deduct their interest costs from company tax, perhaps forgetting their lenders must pay tax on those same interest receipts. The MRRT achieves the same neutrality in a far more practical manner by treating debt- and equity-financed investments the same. Providing an interest deduction for the MRRT, or royalties, would mean that the returns from mines financed by debt are taxed less heavily than the returns from mines financed by equity. Instead, the MRRT imposes the same charge regardless of how the mine is financed. In fact, rather than favouring larger miners, small and medium miners get an important concession with no MRRT to pay where their MRRT liability is below $50 million.

An End to Exit Fees

Last week we had a big victory for Australian families doing it tough with cost of living pressures, with the Parliament supporting the Government's ban on mortgage exit fees, which will apply to all new home loans from this Friday, July 1. No Australian should ever be hit with a huge exit fee just for trying to get a better home loan deal for their family. Lenders should have to win the loyalty of their customers with good service and competitive lending rates, not by shackling their customers with mortgage exit fees.

We've also made real progress on the other banking reforms I announced in December last year. We're investing a total of $20 billion in the residential mortgage-backed securities market, which has kept smaller wholesale lenders open for business and competing with the banks. We've confirmed the Financial Claims Scheme as a permanent feature of our financial system to secure critical deposit funding for our smaller lenders. We've taken steps to build a fifth pillar in the banking system based on the combined competitive power of our mutual credit unions and building societies. And we've already kicked off our community awareness and education campaign to encourage consumers to shop around and get the best deal.

Coming Up

I'm looking forward to discussing the challenges facing our nation at the 2011 Economic and Social Outlook Conference in Melbourne on Thursday. I'll be talking about three of the big factors that are transforming our economy: the rapid economic growth of Asia, the ageing of our population, and the transition to a clean-energy future. Our comprehensive reform program seeks to address these shifts, and position our economy to get through some difficulties now, then make the most of the tremendous opportunities in the years and decades ahead.

Wayne Swan
Deputy Prime Minister and Treasurer of Australia
Sunday 26 June 2011

www.treasurer.gov.au
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