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

2 October 2011

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Treasurer's Economic Note

Few people tend to get excited about tax and payments reform. But everyone has an interest in what it delivers. Like the single pensioner on the maximum rate who has seen an extra $148 each fortnight in payments compared to two years ago. Like the working mum who can now access 18-weeks paid parental leave to look after her new-born baby. Like the shop assistant on $30,000 a year who's paying 26 per cent less tax because of income tax cuts over the past three years. Like the 30-year-old construction worker on average wages who's likely to end up with an extra $108,000 in retirement savings because of the increase in the super guarantee to 12 per cent. Like the small business that from next year will be able to instantly write-off the first $5,000 on the purchase of a new ute, and each and every new business asset that's worth up to $6,500. And like any of the one million extra Australians who will have greater rewards to work and won't have to lodge tax returns after the tax-free threshold is more than tripled. Changes like these have a big influence on people's lives and a big influence on our nation. By affecting the millions of choices that individuals and businesses make every day – about working, saving, investing and spending – tax reform plays an important role in building a more prosperous and fair society.

The Next Steps Forward

I'm looking forward to discussing future priorities and directions for reform at this week's Tax Forum. It will bring together almost 200 representatives of community groups, business, unions and super funds, as well as tax experts and professional economists. I'm keen for everybody to have their say, whether I agree with them or not. Despite what you may have heard, no topics have been banned from discussion. Nothing is taboo. Participants that mention the mining tax or the GST won't have their microphones cut off or be thrown out by bouncers. Yes, there are some reforms we already have underway and others that we've ruled out. It's just commonsense that the Government isn't going to hit the reset button on policies that we've already consulted on extensively over many months or even years. Likewise, we're not going to revisit policies that we've ruled out in the interests of business and community certainty. As the submissions show, there are enough new ideas to discuss without reheating tired old debates. I think most participants will be interested in the next steps forward, not walking around in circles. The Tax Forum will help identify issues worthy of further work and consultation. In doing so, it will help chart the course forward in Australia's tax reform journey.

There are a number of misconceptions about tax that are worth dispelling. One is that taxes are high in Australia. The fact is we consistently rank amongst the lowest taxing countries in the Organisation of Economic Co-operation and Development. That's been the case for decades. In the most recent survey of the 34 member countries, Australia was the sixth lowest taxing nation as a proportion of GDP. When you look just at taxes on individuals, we perform even better: we're the third lowest. We pay considerably less tax than the British, the Americans, the Germans and the French. Another myth about taxes is that they are always going up. The reality is the Government's tax take has dropped considerably in recent years. Commonwealth taxes are estimated to make up 21.8 per cent of GDP this year, down from 23.5 per cent in 2007-08 and the record high set in the middle of last decade of 24.1 per cent.

Chart 1

The Two Sides of Tax Reform

We've been able to implement a substantial tax reform agenda while at the same time keeping taxes low and undertaking the fastest fiscal consolidation on record. It's this sort of discipline that the Government will continue to apply as it approaches further tax reform. My meetings last week with my G20 and IMF counterparts in Washington highlighted the importance of keeping public finances strong and making sure any tax reform is affordable. We've seen how important it is to maintain a strong budget position in recent months as the United States and Europe struggle to get their public finances on a sustainable footing.

Australia's Final Budget Outcome for last financial year released on Friday confirmed our public finances remain amongst the strongest in the developed world. This is despite the fact that government tax revenues have taken a big hit because of global economic instability, the summer's natural disasters and a strong dollar. While recent events have made it a lot harder to get the budget back to surplus as planned in 2012‑13, we're determined to get there and we'll keep working towards achieving that goal. It's obvious in this environment that any tax reform is challenging. It means we can't just talk about cutting or abolishing certain taxes without looking at the other side of the equation: things like closing loopholes and getting rid of unnecessary tax expenditures. All participants at the forum need to keep in mind that it's easy to propose tax cuts, but a lot harder to fund them.

The Asian Century

The greatest economic transformation in modern history is underway in Asia. That's bringing incredible benefits to Australia in the form of the mining boom, but it's also accompanied by a higher dollar and skills shortages that are putting pressure on many other parts of the economy. During the week, the Prime Minister commissioned a White Paper to look at how our nation meets the challenges and makes the most of the opportunities posed by the Asian Century. Some of these challenges will be discussed on Thursday at the Future Jobs Forum at Parliament House, which will bring together representatives from business, unions, government and academia to look at the best ways to build on Australia's outstanding record of job creation in recent years.

Tax reform also has a critical role to play in helping Australia respond to the structural pressures imposed by Asia's rapid development. Changes to the tax system can help businesses adjust in a changing economy and encourage investment in the skills and tools that can provide a new lease of life. Addressing the patchwork economy, where different sectors are growing at different speeds, has been central to our last two budgets and is at the heart of our tax reform agenda both in terms of what we have done so far and what we need to do next. It's why we're introducing legislation to get a fairer return for Australia's non-renewable resources and using the proceeds to cut taxes for businesses across the economy, particularly small businesses. And it's behind our tax reforms to increase workforce participation, which is critical for businesses that are competing for workers with the mining industry.

Creating Opportunities for More Australians

Of course increasing participation is about a lot more than helping businesses get the labour they need. It's also about giving more Australians the opportunity to get a job and the purpose, security and dignity that comes with it. As a Labor Government, this is a core mission. It's why we've made a series of changes to the tax and transfer system to reward hard work. To illustrate the point, I'll give you a concrete example of how two important reforms we've announced this year will help increase work incentives for single parents, especially those seeking part-time work. The Budget included a measure to cut the NewStart income test taper for single parents from as much as 60 cents in the dollar to 40 cents, and as part of the Clean Energy Future package, we're tripling the tax-free threshold from $6,000 to $18,200 from July 1 next year.

Currently a single parent, with children aged 8 and 10 years, who wants to take up a part-time job paying $560 a fortnight, would lose 54 per cent of gross pay through payment reductions and income tax. Under our changes, that parent will get to keep an extra 18 per cent of their pay – that's a further $100 per fortnight or around $2,600 per year. That's a big incentive for a single parent wanting to get back into the workforce as the kids get a bit older and more independent. There are big social benefits as well with OECD evidence showing that having a working parent is an important factor in the development of children and fostering positive attitudes and behaviour. The following chart shows how the Government's measures will reduce the average effective tax rate for a single parent earning up to $1,500 per fortnight with two kids aged over 8.

Chart 2

A Shared Responsibility

Of course tax reform isn't just the job of the Federal Government. It's important to remember that state and territory governments have a critical role to play too because – as the tax review identified – some of the nation's most inefficient taxes are state taxes. For example, stamp duty on property transactions make it a lot more costly for Australians to relocate for work opportunities. It also makes it harder for families who want to upsize or downsize their home as their family circumstances change. Insurance and payroll taxes are also examples of inefficient state taxes. Of course state governments can't just expect the Commonwealth to stump up the cash to bankroll their reforms. The Federal Government is already providing big increases in health and education funding to the states, and state GST revenue has doubled over the past decade from $24 billion to an estimated $48 billion this year. It's clear that the states have to step up to the plate and play their part in improving the efficiency of our tax system.

Finding Common Ground

As I said on Friday, the Tax Forum isn't about reaching some kind of grand bargain. It's about the Government listening, not talking. And it's not about reinventing the tax system overnight. As our sturdy public finances show, we have a good tax system, but we can make it better. For our nation to get the most from the forum, everybody needs to put the national economic interest before their self interest. We can't build prosperity if everyone has their hand out. And we can't simply expect to shift the tax burden to somebody else. It's important that we listen to the views from the kitchen table as well as the boardroom table. With this in mind, I'm confident participants at the Tax Forum will help find some common ground on the next steps forward for reform, and we can develop those proposals further. In doing so, we can continue the journey to strengthen our tax system for a stronger, broader and more modern economy.

Wayne Swan
Deputy Prime Minister and Treasurer of Australia
Sunday 2 October 2011