Over the past month, it seems to have been two steps forward, one step back for Europe. The region’s policymakers have been frustratingly slow to build on the framework announced on October 27 to address their sovereign debt crisis. Europe needs to understand that financial markets don’t work on political timelines, and they are already a long way behind the curve. During the week, there were signs that investors are even becoming concerned about Europe’s biggest economies, evidenced in the disappointing demand for Germany’s latest sovereign bond auction. The global economy has already paid a very high price for the failure of Europe to get its house in order – there can be no excuse for further delays and political dithering. European leaders have the power to stop this becoming a slow motion train wreck. Determined, consistent and continuing action is required by the Europeans to deal with the debt crisis and restore growth.
The situation in Europe is obviously having an impact on Australia. Every self-funded retiree and investor can see this in the effect it’s having on our share market. The heightened global volatility is also making households more cautious in their spending and businesses more hesitant in their hiring decisions. And weaker global growth has impacted on trade outside of the mining sector. This all adds to the existing stresses felt by parts of our patchwork economy, which are already under pressure from the high dollar.
Many people don’t realise that one of the lingering effects of the global financial crisis has been a massive write-down of tax receipts in Australia – government revenues are down by $130 billion over the five years to 2012-13 from the pre-GFC forecast. One component of this is lower capital gains tax. This is paid, for instance, by investors on profits they earn on share transactions. Given the decline in the stock market, investors aren’t making the same profits and so aren’t paying the same level of tax that they were only a few years earlier. The renewed global uncertainty in recent months has seen share markets around the world decline even further, with the Australian market down about 15 per cent since the May Budget. This will result in lower-than-expected capital gains tax from companies, superannuation funds and individuals. All up, we expect that lower asset prices will reduce forecast capital gains tax by $7 billion over the forward estimates compared to what was expected in May.
The substantial hit to revenues caused by global economic turbulence means we’ll have to make some difficult decisions to find savings in the upcoming Mid-Year Economic and Fiscal Outlook. As the lessons of Europe’s current turmoil show all too clearly, maintaining our fiscal rigour is absolutely critical at a time when international financial markets are punishing those countries that lack discipline. But just as it would be wrong to abandon our determination to return to surplus in 2012-13, it would also be counterproductive to take an axe to the budget in these uncertain times for the global economy. As always, the Government will maintain the right settings to suit the economic circumstances, striking the balance between strong fiscal discipline and continuing to support job creation and growth. It’s this type of responsible management that helps underpin confidence and prosperity for the long term – that’s vital for ordinary Australians.
The thing I value most about being in politics is the opportunity to put in place big, long-lasting reforms that benefit the lives of Australians right around the country. During the week, the Gillard Government secured support for the Minerals Resource Rent Tax, which will help deliver a suite of measures to benefit families, businesses and communities. One of these measures is a big boost to superannuation that will help provide security and dignity to Australians in their later years. The increase in the superannuation guarantee from 9 per cent to 12 per cent will deliver 8.4 million Australian workers a much more secure and comfortable retirement. Like the 22-year old hairdresser who will see an estimated $99,500 jump in their savings at retirement. Like the 25-year old receptionist who will gain an extra $94,500. Like the 35-year old plumber who will see a $75,000 benefit. Or like the 40-year old construction worker who will end up with a $70,000 boost to their retirement nest egg. This is one of the ways we’re locking in the benefits of the mining boom and delivering a fair return to Australians from the nation’s resource wealth.
The increase in the superannuation guarantee is forecast to boost the nation’s pool of savings by a staggering $500 billion by 2035. Retirement savings are not just important for individuals and their families, they’re also important for the nation as a whole. A large proportion of these savings get channelled back into our economy through investments. The funds help grow businesses, build infrastructure and create jobs. Australia’s pool of super savings was one of the reasons we came through the global financial crisis in such good shape. When international credit markets seized up, many Australian companies were able to get the funds they needed at home. The super guarantee will be boosted progressively, with increases of 0.25 percentage points on 1 July 2013 and 1 July 2014. It will then be raised by half a percentage point each year until it reaches 12 per cent in 2019-20. The MRRT helps fund the concessional tax treatment that these extra super contributions will receive. The phase-in approach will give time for employers and employees to adjust and plan ahead.
As well as building up the retirement savings of Australian workers, the mining tax will also help make super a whole lot fairer for 3.6 million workers on low incomes. From 1 July 2012, effectively no tax will be paid on the super guarantee for those earning up to $37,000 a year. By providing this concession, more money – up to $500 a year – will be directed into the retirement savings accounts of those workers who need it most. For example, a shop assistant earning $30,000 a year with no other income receives an annual super contribution from their employer of $2,700. Under this new measure, the 15 per cent contribution tax will effectively be refunded, meaning the shop assistant gains an extra $405 in her super account. This important reform rewards hard work, and will help deliver greater financial security and retirement savings for more than one in three Australian workers.
While demand for our resources is clearly a major economic benefit for Australia as a whole, it’s also accompanied by a higher dollar that’s making life tougher for businesses like manufacturing, tourism and education that compete in international markets. The stronger currency has meant the success of one sector has made life more difficult for other sectors. With the MRRT we can use the strength of the mining boom to strengthen the entire economy. As well as by increasing superannuation, we’re also doing this through tax cuts that give much-needed relief to businesses that aren’t in the fast lane of the mining boom.
Revenue from extremely profitable mining companies will go towards tax breaks for Australia’s 2.7 million small businesses. From 1 July 2012, small businesses – whether they are run by sole traders or through companies, partnerships or trusts – will be able to immediately write-off each and every asset they buy worth up to $6,500. For example, a restaurant that buys two fridges worth $3,000 each, a coffee machine for $2,000, a cook top for $1,500 and a computer for $1,755 will be able to deduct the full cost of each item straight off its taxable income for that year. This would provide the restaurant with a one-year cash-flow benefit of $2,758 compared to the current system where assets are depreciated over a number of years. Besides encouraging small businesses to invest in new equipment to grow their operations, this measure makes book-keeping a whole lot simpler.
The MRRT will spread the dividends of the boom so they can make a much greater contribution to jobs, to infrastructure, to national savings and to sustainable growth across the entire economy. The vast majority of the mining industry understands the importance of this reform. Far from putting a handbrake on investment, mining companies are continuing to ramp up production. New investment in the sector has risen from $35 billion in 2009-10 to nearly $50 billion last year and an expected $82 billion this year. Mining will continue to power ahead and, under the new arrangements supported by the lower house this week, the Australian community will start receiving a fairer return for the resources they own.
While the scars aren’t all healed and there’s still more rebuilding to be done, my home state has bounced back after last summer’s natural disasters. On Friday, I spoke with the head of the Queensland Reconstruction Authority, Major General Dick Wilson, to discuss what’s been achieved and to talk about preparations for the summer ahead. I’ll continue speaking to him regularly over the summer months. Authorities in Queensland – as well as other states – are working hard to make sure our communities are well prepared for the worst nature can throw at us.
Deputy Prime Minister and Treasurer of Australia
Sunday 27 November 2011