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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

3 June 2012

Treasurer's economic note

Next month over 7 million Australians will start bringing home a bigger pay packet. Like the student, who will get a tax cut of $600 next financial year on the $20,000 he earns from working part-time in a restaurant. Like the returning-to-work mother, who will receive a tax cut of $503 on the $25,000 she makes doing clerical work a few days each week. Like the part-time nurse earning $45,000, who will pay $303 a year less in tax. Like the primary school teacher earning $70,000 a year, who will get a $253 tax cut. In fact every taxpayer with an income of up to $80,000 will get a tax cut from the start of next month, with over 6 million Australians more than $300 a year better off.

A Landmark Reform

For me, what’s particularly pleasing is that this tax relief is being delivered through an important reform: the tripling of the tax-free threshold. From July 1, the threshold will increase from $6,000 to $18,200. This is the largest increase in the threshold ever and the first increase in more than a decade. From 1 July 2015, the tax-free threshold will increase again to $19,400 as part of the Clean Energy Future package.

Tax-free threshold

The higher threshold provides more timely assistance than what is currently offered under the Low Income Tax Offset, which is being scaled back. This means workers will receive more tax relief in their fortnightly pay packets, rather than having to wait until tax time for a refund. The changes will particularly benefit part-time workers, such as mothers who are getting back into the workforce as their children get older. Importantly, the higher threshold reduces the complexity of the tax system. Up to 1 million Australians will no longer have to lodge a tax return and around 630,000 additional people will no longer have to pay any tax.

Helping Those on Low Incomes

This reform builds on the $47 billion in personal income tax cuts the Labor Government delivered in its first three years in office. It 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.

Cumulative percentage reduction in tax from 2007-08 to 2012-13 by
taxable income

Increasing the tax-free threshold is a really effective way to provide tax relief to Australians on low and middle incomes and at the same time encourage workforce participation. Better rewards for work mean more Australians in work. For these reasons, the Prime Minister and I would one day like to see the threshold increased further to $21,000 when budget circumstances permit. Even with the existing planned increase from July 1, Australia’s effective tax-free threshold will be well above other advanced economies, which demonstrates what an important reform this is to boost our competitiveness and strengthen our workforce while also providing some financial relief to low income Australians.

Effective tax-free threshold in Australian dollars

My side of politics has always believed – and I think most Australians do too – that the tax system should properly reward hard work and encourage more people to participate in the workforce. That’s what the tax-free threshold and our progressive tax rate scales deliver. As I argued in my essay in The Monthly earlier this year, our progressive tax system – along with our well-targeted transfer system and high quality education – has helped make Australia a more equal society than most. Incomes for the poorest 10 per cent of households in Australia have grown at more than double the OECD average in recent decades, while growth in the United States and the United Kingdom has been substantially below average. The tax-free threshold is an important way of ensuring our tax system continues to deliver fairness for all Australians.

More Australians in Work

Yesterday morning we woke to some disappointing jobs figures from overseas, with unemployment rates of 11 per cent reported for the euro area and 8.2 per cent for the United States. It’s another reminder of how much better our economy has performed over the past few years. While data moves around from month to month and our own unemployment rate of 4.9 per cent may tick up slightly in the period ahead, it’s important we don’t lose sight of how different our situation is to most other developed economies. Over three quarters of a million new jobs have been created since Labor came to office, while millions of jobs have been destroyed in both the U.S. and Europe over the same period.

Central to Australia’s success was our targeted stimulus response that meant we were almost alone in the developed world in avoiding recession in the aftermath of the global financial crisis. The benefits of this may be much longer lasting than many people realise. An interesting article in The Economist during the week looked at how the GFC may have permanently reduced the American economy’s productive capacity by destroying jobs and capital, and stunting innovation. This meant that when the U.S. emerged from recession, the recovery was much weaker than many expected. Here at home, the success of our stimulus not only kept the doors of Australian businesses open and Australian workers in jobs during the depths of the global downturn, it also secured the foundations to help deliver continuing economic success. The evidence is clear with our economy today more than 7 per cent larger than it was before the crisis, while the U.S. economy has barely grown at all. What’s more, Australia’s economy is forecast to grow faster than every single major advanced economy over the next two years.

A Vote of Confidence in Our Economy

We’ll get the official snapshot of how our economy performed last quarter with the release of the National Accounts on Wednesday. While our economy is the standout performer of the developed world, we know that conditions remain uneven. The high dollar, cautious consumers and difficult global conditions are weighing heavily on some sectors. We also know that there were some one-off factors that disrupted resource exports last quarter, including cyclone activity in Western Australia that resulted in temporary port closures.

Whatever the GDP result, however, we should remember our economic fundamentals remain rock solid. During the week, new figures showed businesses planning to make record investments in buildings, equipment and infrastructure. Total capital expenditure is expected to increase from $158 billion this financial year to a record $173 billion next year, with resource companies planning to invest a staggering $119 billion. This is over 150 per cent higher than its level two years before and 13 times the level of investment before the first phase of the boom. And there’s more of this to come, with the total pipeline of mining investment now at an all-time high of half a trillion dollars. Certainly, it’s another reality check for those who try to talk down the future of this great industry.

Given the massive scale of individual projects in the resource sector, we shouldn’t be surprised to see unevenness in capital expenditure figures in coming quarters. The big picture, however, is that businesses are continuing to invest strongly to expand production. While mining investment accounts for the majority of the pipeline, manufacturers plan to spend $10.5 billion next year, and service providers and other companies $43.9 billion. Despite uncertain times around the world, the capital expenditure figures are a resounding vote of confidence in the future of our economy.

This investment is helping lift the productive capacity of our economy, which is a key ingredient for prosperity. While there has been a decade-long decline in productivity growth, we do need to keep our productivity performance in perspective. Not only is it normal for productivity growth to be a bit lower during an investment boom, but Australia is already ranked within the top dozen countries in the world in terms of productivity levels. This huge investment pipeline will help drive productivity and economic growth in the years to come.

Strengthening business investment is one of the reasons why returning the budget to surplus next year is the right thing to do. For an economy with solid growth, low unemployment and a record pipeline of investment, it is an appropriate time to keep strengthening our public finances. This is all the more important given current global volatility and the profound challenges facing Europe. Returning to surplus also ensures that the Government is not generating price pressures in the economy, giving the Reserve Bank the room to cut interest rates further if the independent board thinks that’s necessary. While I don’t speculate on future interest rate movements, we’ve already seen the benefits of this policy. The official cash rate is now lower than at any time under the previous government, and a family on a $300,000 mortgage is now paying around $3,500 a year less in repayments than when we came to office. Much lower official interest rates than when we were elected is one of the clear dividends for Australian families from this Government’s responsible approach to budget management.

Wayne Swan
Deputy Prime Minister and Treasurer of Australia