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

Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

31 July 2011

NO.028

Treasurer's Economic Note

Challenges in the Global Economy

It's a really critical week in the global economy as the US approaches the deadline to increase its debt ceiling, and policy-makers continue to grapple with sovereign debt challenges in Europe. US authorities are working around the clock because they understand the importance of getting an agreement, for both the US and global economy. No doubt the authorities will have to make some very tough decisions to get the US fiscal house in order, and to stabilise national debt. The challenges facing Europe are adding to this uncertainty, with many countries struggling will high unemployment and excessive sovereign debt. We've now seen an agreement reached by European leaders on a new deal to help manage the sovereign debt situation, including a further rescue package for Greece. This is an important step at a time of fragile global sentiment, but many countries are still facing a long and painful adjustment period to reduce their debt burdens and kick-start more sustainable levels of growth.

We should be under no illusions about the magnitude of these challenges on both sides of the Atlantic, but we should also draw confidence from our strong economic fundamentals and our proven track record of dealing with global instability. Having fought off the global recession, we have amongst the lowest public debt in the developed world, a massive pipeline of investment (more about that below), low unemployment, strong financial institutions and world-class regulators. We live in a globalised economy so obviously we're not immune from global developments, but among all the white noise of the daily political debate, we shouldn't forget our economic credentials are among the strongest in the world.

Our Strong Economic Fundamentals

Our strong economic fundamentals were on full display last week, with Origin Energy announcing that it is powering ahead with its Australia Pacific LNG project in Queensland – one of the largest LNG export projects in the country. This is a $20 billion investment, so it's big news for our nation and even bigger news for my home state of Queensland. The project will deliver widespread economic benefits, including the creation of 6,000 direct jobs during construction and 1,000 direct ongoing jobs.

We also saw further evidence of our exceptional investment pipeline with the release of Deloitte Access Economics' Investment Monitor (which lists projects with a value of $20 million or more). This showed that the value of total recorded projects increased $64 billion in the June quarter alone, to be over $830 billion – 8.4 per cent higher than a year ago. Despite the scare campaigns about the coal sector, the Investment Monitor showed that the pipeline of significant coal projects increased to $44.9 billion – that's 52.9 per cent higher than a year ago, and 18 per cent higher over the quarter. This just confirms the bright future for the coal sector, with companies already factoring a carbon price into their investment plans.

Despite our underlying strength, we know that the investment boom is a mixed blessing for many businesses. Clearly the high dollar is making life pretty tough for many trade-exposed sectors like tourism and manufacturing. The lingering effects of the GFC are adding to this, with a cautious consumer and tighter credit making business conditions a bit tougher, particularly in retail. I'm acutely aware many businesses are doing it tough, which is why we're so focussed on spreading opportunity to every corner of our patchwork economy. It's why we put in place major reforms in the Budget to make sure our training systems better match the needs of business, and why we're delivering on business tax. I'm sure these challenges will be well and truly in the mix for debate at the Tax Forum.

Consumer Price Index

Of course many households also face some challenging times, particularly due to cost of living pressures. Anyone putting fresh food in the trolley in Australia in recent months knows that prices, particularly for fruit and vegies, remain much higher than usual. This was confirmed in the inflation figures released last week, which reflected the flow-on effects from last summer's natural disasters. The Consumer Price Index rose 0.9 per cent in the June quarter, and 3.6 per cent over the year. The biggest driver of the result was a further sharp increase in fruit prices, which rose 26.9 per cent in the quarter and contributed around 0.4 of a percentage point to the quarterly CPI outcome. The headline figure also reflects higher global oil prices, with fuel prices rising 4 per cent in the quarter, contributing around 0.2 percentage points to the quarterly CPI outcome.

For our part, the Government is doing absolutely everything we can to ensure we don't add to price pressures by delivering the fastest fiscal consolidation on record. As the RBA made clear in its recent Statement on Monetary Policy, "with the budget projected to return to surplus over the next few years, the impact of fiscal policy will be contractionary."

Tax Forum

To inform public debate in the lead-up to the Tax Forum I'll be hosting later this year, Assistant Treasurer Bill Shorten and I last week released a discussion paper which sets out the six sessions that will be held at the forum – personal tax, transfer payments, business tax, state taxes, environmental and social taxes, and tax system governance. We also released an initial invitation list for the Tax Forum, with about a third of participants selected for direct invitation, about a third to be chosen by organisations named in the list, and the final third to be chosen through an online expression of interest process. As I said on Thursday, we live in a community, not a corporation, and so I encourage anyone in our community who wants to contribute to the national reform debate to get involved, either by submitting an expression of interest to attend the forum by filling in the online form by Friday 12 August, or by sending in submissions and comments for publication on the Tax Forum website.

Building on an Ambitious Reform Agenda

The Tax Forum will build on what has already been a really ambitious tax agenda, with reforms spanning personal tax and superannuation, welfare and family payments, business and resource tax, environmental and social taxes and tax system governance. Our reforms include:

  • Personal tax cuts in our first three Budgets worth a total of $47 billion. These tax cuts mean that a person on $50,000 pays $1,750 less tax this year than they would under the 2007‑08 tax scales.
  • A boost to the super guarantee from 9 to 12 per cent, and a government contribution worth up to $500 for 3.5 million low-income earners. For an average worker aged 30, the increase to the super guarantee is projected to increase their retirement savings by $108,000.
  • An historic increase in the base rate of the pension, and better indexation so the pension keeps up with pensioners' cost of living. Since these two reforms started in September 2009, we have increased pensions by around $128 a fortnight for singles and $116 per fortnight for couples combined.
  • Better incentives to participate in the workforce, by phasing out the Dependent Spouse Tax Offset, introducing a new Work Bonus to reward Age Pensioners who do some part-time work, decreasing the withdrawal rate of the Newstart Allowance for single principal carers, increasing the income-free area for Youth Allowance (Other), and increasing the number of hours that people on the Disability Support Pension can work.
  • A cut in the company tax rate to 29 per cent and a major tax break for small business, allowing them to instantly write-off each and every business asset costing up to $6,500 and the first $5,000 of the cost of a motor vehicle from 2012-13. This small business tax break together with our streamlined depreciation arrangements for assets costing more than $6,500, will provide an extra $1 billion in cash flow assistance for small businesses in 2013-14 alone.

Tax Reform and Tackling Climate Change

We announced another key tax reform just a couple of weeks ago as part of our Clean Energy Future measures to put a price on carbon pollution and help households and businesses to adjust to flow-on price increases. For households, this assistance will be delivered in personal tax cuts and increased payments and pensions that will be paid for by the nation's 500 biggest polluters. These changes will mean a trebling of the tax-free threshold to over $18,000, which will mean more reward for hard work, particularly for part-time workers, and more money in the pockets of Australians each week. As I explained in a speech to the Council of Small Business of Australia last week, after accounting for increases in gas, electricity and things like rent arising from the carbon price, there will still be about $1.9 billion of this assistance left to spend down at the shops.

I also caught up last week with Sir Richard Lambert who has run Britain's biggest industry association, edited the Financial Times, served on the UK's monetary policy committee and is currently a university chancellor and a British ambassador. It was a really valuable meeting, and a reminder of how important it is for business that we get on with the job of pricing pollution. As Sir Richard said to Lateline Business, pricing pollution isn't a "zero sum game [where a] win for the environmentalists means a loss for business. There's a lot of new business, there's a lot of innovation happening and new investment happening". He is spot on. Sir Richard also wrote a 'myth-busting' article that is well worth a look at here.

We reached another milestone in our plans to tackle climate change with the release of draft legislation for public consultation. This legislation provides the long-term certainty that industry needs for the next stage of economic development in Australia, shifting the economy to clean-energy sources and harnessing innovation and new clean technologies. This will cut Australia's net emissions from a 'business as usual' projection of over 1 billion tonnes per year in 2050 to just over 100 million tonnes, effectively saving nine out of every ten tonnes we were forecast to emit. Over the period, over 17 billion tonnes of carbon pollution will be saved. The legislation is available here. It's reforms like putting a price on carbon pollution that show we're not just keeping our economy strong in the face of some serious global challenges in recent times, but also taking the tough actions needed to protect our economy and our environment for the long term.

Wayne Swan
Deputy Prime Minister and Treasurer of Australia
Sunday 31 July 2011

www.treasurer.gov.au
twitter.com/SwannyDPM