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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

9 October 2011

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Treasurer's Economic Note

There are plenty of memorable days in Parliament. For me, the most important have been the votes to pass the stimulus packages in late 2008 and early 2009. As time has shown, the passage of those bills prevented Australia going into a deep and damaging recession, and avoided countless business failures and the loss of tens of thousands of jobs. Because of those tough decisions our economy is in a much stronger position today. The House of Representatives is set to make a decision of equal significance for our nation and our economy this Wednesday with the vote on the Clean Energy Future  package. Putting a price on carbon will break the link between emissions growth and economic growth, driving innovation to find better, less polluting ways of producing power, goods and services. As well as a cleaner environment, it will deliver better jobs for our children and grandchildren and a more secure economic future. It's not an easy reform and I realise it's got some vocal opponents. But Wednesday's vote is about doing what's right for our country and what's right for our economy. Like the big reforms of the '80s and '90s that met with fierce resistance when they were first announced, I'm confident that in time more and more Australians will come to recognise how important this decision is for both our generation and those to come.

A Price on Pollution

The carbon price is not a tax on households. It will only apply to around 500 of Australia's largest polluters, who will need a permit for every tonne of carbon pollution they produce. This creates an incentive to cut pollution. Some of the cost will be passed on, leading to modest rises in prices. On average, households will see cost increases of $9.90 per week, while the average assistance will be $10.10 per week. Almost 6 million households will be assisted to meet their entire average price impact. The assistance will be delivered through increases in pensions, allowances and family payments, and also through personal income tax cuts.

For me, what's particularly pleasing is that these tax cuts will build on our strong record of tax reform . The Government has cut personal income tax by $47 billion over the past three years, providing a saving of $1,750 a year to a person on a $50,000 annual salary. Part of the carbon price package is an $8 billion reform that will cut tax for all taxpayers up to $80,000 and will mean around 60 per cent of taxpayers get a cut of at least $300 from 1 July 2012. That means next year someone earning $50,000 will be paying $2,053 less tax compared to 2007-08, cutting their tax bill by 21 per cent. For someone on $35,000, their tax bill will be 40 per cent less compared to 2007-08 while someone on $20,000 will no longer have to pay income tax at all.

Chart 1

Note: Excludes Medicare Levy and the temporary flood and cyclone reconstruction levy

Next year's tax cuts will be delivered through a major structural reform that increases the tax‑free threshold from $6,000 to $18,200. The threshold will then increase to $19,400 from 1 July 2015. Significantly, this will free over 1 million Australians from having to lodge a tax return. Regular wage earners with incomes below the new tax-free threshold will not have any tax withheld from their wages by employers, which will mean higher take-home pay and better incentives to work. The changes will particularly benefit part‑time workers and workers on low incomes, ensuring that they pay less tax.

The Next Steps

It was pleasing that reforms like this received a lot of support at the Tax Forum  and Future Jobs Forum during the week. On Thursday, I announced that our first priority in further personal tax reform was to increase the tax-free threshold all the way to $21,000 when the budget allows it. Encouraging more Australians into the workforce is one of the important ways we're dealing with the challenges posed by the patchwork economy, which was central to last week's discussions. It was also really encouraging to see broad agreement among forum participants about the need for targeted measures to help struggling businesses adjust to a changing economy. The Government has asked Chris Jordan, the chairman of the Board of Taxation, to head a working group that will look at potential changes to business taxes and how to fund them. With many industries struggling because of a high dollar, particularly manufacturing, the tax system needs to do more to encourage investment in new skills and tools that can provide businesses with a new lease of life. At the Future Jobs Forum, the Prime Minister announced she will chair a taskforce  including industry leaders, unions and other senior ministers to look at further steps to ensure a strong future for our manufacturing sector. Dealing with the challenges of an economy where different sectors are growing at different speeds has been central to our last two Budgets and it's been at the heart of our tax reform agenda to date – and that's why the three days of discussions were so important as we look at the next steps forward.

A Position of Strength

Despite the patchwork pressures and continued global instability, there were encouraging economic figures out during the week. We saw the strongest back-to-back monthly increase in retail sales in almost two years and our trade surplus surged to its second highest level on record in September. Our strong economic fundamentals and record of responsible management received a ringing endorsement from the International Monetary Fund  (IMF) on Friday."Australia's performance since the onset of the global financial crisis has been enviable," the IMF notes in its annual Article IV staff report."It was one of the few advanced economies to avoid a recession in recent years, reflecting its strong position at the onset of the crisis and a supportive macro policy response." The IMF forecasts Australia's economy will grow 3.3 per cent in 2012, faster than any of the major advanced economies, and notes we're"well positioned" to deal with the current global instability. The IMF recognises that our determination to get the budget back to surplus in 2012-13 puts us miles ahead of our peers and will take"some pressure off monetary policy and the exchange rate." The IMF also endorses key elements of the Government's agenda to maximise the benefits and tackle the challenges of mining boom mark II, including our Minerals Resource Rent Tax, superannuation reforms, critical investments in skills and training, and changes to boost workforce participation. Importantly, given Wednesday's vote in Parliament, the IMF repeats its strong backing for Australia's plan to prepare our economy for a clean energy future, noting that a price on carbon is the cheapest and most efficient way to reduce pollution.

Need for Collective Action

Later this week I'll be attending the G20 Finance Ministers Meeting  in Paris. My clear message will be that both individual and collective action is needed by nations to address the international financial market volatility and put the global economic recovery back on track. I welcome the positive steps taken during the week by European central banks to boost liquidity and support growth, as well as further progress made by leaders towards implementing their 21 July agreement to scale up the European Financial Stability Facility. Of course, Europe still faces very serious challenges and further action is still required to recapitalise the European banking system and to put their fiscal positions on a sustainable path, while supporting short-term growth where possible. We also need to ensure the IMF has sufficient resources to help nations make these difficult adjustments in the period ahead. Developing economies also have an important role to play by doing more to spur domestic demand and shift to market-based exchange rates. I argued this case both directly to Chinese leaders on my recent visit to Southern China, as well as at recent IMF and G20 meetings in Washington, and I'll continue to do so at this week's G20 meetings in Paris. While serious challenges remain around the world, Australians have good reason to be confident. Our strong fundamentals mean we're better placed than just about anyone to deal with the current global instability.

Wayne Swan
Deputy Prime Minister and Treasurer of Australia
Sunday 9 October 2011