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

11 September 2011


Treasurer's Economic Note

While we may have a bit of a grizzle when tax-time rolls around each year, most Australians understand why it's so important they pay their fair share. We all realise the role it plays in funding our schools and hospitals, maintaining our roads and delivering all the essential services that communities need. What's not as well appreciated is the important role the tax system plays in economic reform. At an individual level, taxes have a big influence on decisions to work, spend, save and invest. They affect business decisions on hiring and investment and, more broadly, how competitive our economy is compared with others around the world. By changing taxes, we change incentives and change behaviour. In this way, the tax system is a powerful tool for creating a more prosperous and fair society.

Patchwork Challenge

The Tax Forum I'm convening next month comes amid some huge changes in the global economy which present big opportunities for Australia, but also big challenges. With international demand for our mineral resources at all-time highs, we're experiencing one of the most significant economic shocks in our history. While this boom means that Australia as a whole is getting wealthier, it's also accompanied by a higher dollar that's hurting many trade-exposed industries. On top of this, the lingering effects of the global financial crisis and continuing international uncertainty have resulted in Australian consumers being a lot more cautious in their spending. All up, this is making life harder for sectors like manufacturing, tourism and retailing. The tax system has a critical role in helping our economy adjust to this change and spreading the benefits of the mining boom to all corners of the patchwork economy.

Addressing the challenges posed by different parts of the economy growing at different speeds has been a guiding principle behind the Government's approach to tax reform. One of the main purposes of the Minerals Resource Rent Tax is to help those businesses that aren't in the fast lane of the mining boom. Revenue from extremely profitable mining companies will go towards a cut in the tax rate for all companies and provide a major tax break for Australia's 2.7 million small businesses. Another way we're dealing with the patchwork economy is through measures to increase workforce participation, which is critical for businesses that are competing for workers with the mining industry. The tax and transfer system plays a role here too. Changes, such as the improved Work Bonus for older Australians, are all about creating the right rewards for work.

A Record of Reform

Over the past year and a half, we've announced a total of 32 measures reflecting reform directions identified by the tax review:

April 2010

  • Increase in the excise on tobacco products

May 2010

  • $500 low-income earners government contribution
  • Increase in the superannuation guarantee age limit
  • Continuation of the $50,000 concessional contribution cap
  • Cut in the company tax rate
  • Head start in the company tax rate cut for small businesses
  • Increase in the instant write-off threshold for small businesses
  • Single depreciation pool for other assets for small businesses

2010-11 Budget, May 2010

  • Reform of fuel tax towards energy-content based taxation
  • Introduction of the optional standard tax deduction
  • Introduction of the 50 per cent tax discount on interest income
  • Phasing down interest withholding tax on financial institutions

July 2010

  • Introduction of the Minerals Resource Rent Tax
  • Extension of the Petroleum Resource Rent Tax
  • Better reporting of superannuation payments to employees

August 2010

  • Expansion of the use of tax file numbers
  • Increase in Family Tax Benefit Part A for 16 to 19 year olds
  • Commitment to a principles-based approach to tax laws design
  • Empowering of the Board of Taxation to initiate its own reviews
  • Establishment of the Tax System Advisory Board

2011-12 Budget, May 2011

  • Phasing out of the Dependent Spouse Tax Offset
  • Reform of the fringe benefits tax treatment of cars
  • Decrease in taper rate of Newstart for single principal carers
  • Increase in hours that Disability Support Pensioners can work
  • Changes to eligibility for the Parenting Payment
  • Better alignment of Family Tax Benefit and Youth Allowance
  • Instant write-off of first $5,000 of vehicles for small businesses
  • Replacement of the Entrepreneurs Tax Offset
  • Uplift factor for losses of certain infrastructure project
  • Establishment of Aust. Charities and Not-for-profits Commission
  • Introduction of a statutory definition of 'charity'
  • July 2011
  • Reform of tax-free threshold and the Low Income Tax Offset

These are significant reforms, but as always there's more work to be done. The Tax Forum, which is bringing together representatives of community groups, businesses, unions and governments, as well as academics and tax practitioners, is all about discussing the next steps to deal with the challenges of our patchwork economy. All participants should keep in mind that any changes to our tax system must be affordable. One of the great economic strengths Australia has built up is our strict fiscal discipline – our debt is a fraction of the level of other advanced economies. We've seen how important it is to maintain a strong budget position in recent months as the United States and Europe have struggled to get their public finances on a sustainable footing. So the Government will not be in the cart for any measures that compromise our strict fiscal discipline. That means any proposals for tax cuts should explain how they can be funded.

Ideas from the forum will be discussed in Parliament and feed then into normal government decision making. I'd make the point that this process isn't about an overnight revamp of the entire tax system. Tax reform is an incremental, ongoing process – as you can see with the significant reforms we've introduced in the past few years. The Tax Forum will help the Government set the course for the years to come, by identifying the priorities and directions that should be the focus of further work and consultation.

Ahead of the Pack

This week marks the third anniversary of the fall of Lehman Brothers, which triggered the global financial crisis. Thanks to the Government's swift policy response, our strong fundamentals and the resilience of Australians, we avoided losing tens of thousands of jobs and countless business failures. Almost alone in the developed world, we kept out of recession. Our economy has grown by over 5 per cent since then, while most of our peers have yet to get back to square one. We saw in the National Accounts last week that Australia continues to outperform. Our economy grew at six times the pace of Europe and the US last quarter. It was a reality check for the doomsayers that have been talking our economy down in recent times. The figures show businesses are investing with confidence, incomes are rising, and household consumption remains healthy at around its trend level.

The patchwork pressures, however, are still there as we saw on Thursday with an uptick in the unemployment rate to 5.3 per cent. But we shouldn't lose sight of the bigger picture. Despite the increase in unemployment, there are still 140,000 more Australians employed today than there were 12 months ago and nearly three-quarters of a million jobs have been created since we were first elected. In fact, recent jobs data has underestimated the strength of demand for labour in our economy given an increase in working hours. For instance, many part-time workers have been picking up a few extra hours each week. Had employers met the increase in labour demand by hiring new workers, we would have seen an additional 110,000 jobs created since the start of the year. Today, the Prime Minister and I announced we're going to hold a one-day jobs forum next month to discuss how Australia can build on our tremendous record of job creation in recent years, and best position our nation to benefit from changes we're seeing in the global economy.

A Focus on Productivity

The National Accounts also showed a big gain in productivity in the June quarter, but as I've argued, you can't read too much into a single quarter's productivity figures. What we do know is that productivity growth has been declining for over a decade. The recent boom in business investment has played a role in this because it takes time for that investment to deliver the extra output it's designed to produce. This spending, although a drag on productivity now, will increase our economy's capacity down the track. For example, a lot of time, effort and money is going into building new mines at the moment that aren't producing a single lump of coal or iron ore. When the mines get up and running, we'll also see the benefits to productivity flow through.

The more concerning factor in the productivity equation has been the decade of neglect in critical infrastructure and skills investment. Since this Government came to office we've been focused on reversing this. That's why we're doing what we can to invest in better transport infrastructure, the NBN and a more competitive tax system. It's also why we're investing in skills and training, such as the $3 billion investment I announced in the Budget which was widely welcomed by the business community as well as unions, community groups and respected economists. Increasing productivity should be all about building up our workforce, not stripping away the rights and conditions of workers. We know from history that big reforms take time to implement, and time to see the pay-offs. We can't flick a switch and turn that around overnight, but we've got the investments in place to deliver benefits in the long term.

Back to Parliament

It's going to be a big week with the introduction of the Clean Energy Future package into the Parliament. I'm looking forward to the debate and also getting on with introducing this critical economic and environmental reform. The legislative package will give businesses and investors certainty about the carbon price, allowing them to plan new investments including in the renewable and clean-energy technologies of the future. A price on carbon is the next step forward on Australia's economic reform road.

Lastly, our thoughts today are with the family and loved ones of those who lost their lives ten years ago in the attacks in New York, Washington DC and Pennsylvania.

Wayne Swan
Deputy Prime Minister and Treasurer of Australia
Sunday 11 September 2011