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

16 December 2012

Treasurer's economic note

Two of the biggest issues clouding the outlook for the global economy are the U.S. fiscal cliff and the European sovereign debt crisis. While each has its own particular challenges, both require a policy response that balances the urgent need for growth with a plan to repair strained public finances. Fiscal sustainability is a challenge that's not just limited to the U.S. and Europe. Governments all over the world have to adjust to a new reality. The global financial crisis and the turbulence that has followed have decimated traditional sources of revenue. That means all governments have to make do with less.

In Australia, tax receipts are down by tens of billions of dollars every year compared to where we expected them to be before the GFC struck. The Federal Government has responded by putting in place responsible savings and targeting resources to where they are most needed. We've delivered more than $150 billion in savings over five budgets and the recent mid-year update. Going forward, we'll need to find more savings to fund priorities that strengthen our community and our economy – things like school funding and disability reform.

Hard Yards on Tax and Transfer Reform

A large proportion of the savings have been delivered through reforms to the tax and transfer system. These include measures like cutting back tax breaks for those on high incomes and ensuring government payments go to those who need them most. Many of the changes have been hard fought, but they have all been absolutely essential to ensure government finances are sustainable in the long term. And the savings mean resources are available to keep funding schools, hospitals and other vital services that our communities rely on.

The Government has been progressively reforming the tax system since coming to office to not only ensure our public finances remain sustainable, but also to create better incentives for business investment, encourage workforce participation and lift the nation's overall productivity. Among the substantial tax reforms are a total of 40 measures that draw on directions identified by the Henry tax review. Many of these reforms have helped increase the resilience of not only our budget but also our entire economy.

April 2010

  1. Lift tobacco excise

May 2010

  1. Introduce the Low Income Superannuation Contribution
  2. Introduce a higher concessional contributions cap for people aged 50 and over with less than $500,000 in superannuation
  3. Lift the instant asset write-off threshold for small businesses
  4. Create a single depreciation pool for other assets for small businesses

2010-11 Budget

  1. Reform fuel taxes towards energy-content based taxation
  2. Phase down interest withholding tax on financial institutions

July 2010

  1. Minerals Resource Rent Tax
  2. Extend Petroleum Resource Rent Tax
  3. Better reporting of superannuation payments to employees

August 2010

  1. Expand the use of tax file numbers
  2. Lift Family Tax Benefit Part A for teenagers
  3. Commit to a principles-based approach to tax laws design
  4. Empower the Board of Taxation to initiate its own reviews
  5. Establish a Tax System Advisory Board

December 2010

  1. Review to modernise the tax treatment of trusts

2011-12 Budget

  1. Phase out the Dependent Spouse Tax Offset
  2. Reform the fringe benefits tax treatment of cars
  3. More generous taper rate for Newstart for single principal carers
  1. Lift the hours that Disability Support Pensioners can work
  2. Reform Parenting Payment eligibility
  3. Better align Family Tax Benefit and Youth Allowance
  4. Immediate write-off of first $5,000 of vehicles for small businesses
  5. Replace the Entrepreneurs' Tax Offset with better incentives
  6. Establish an Australian Charities and Not-for-profits Commission
  7. Introduce a statutory definition of 'charity'

July 2011

  1. Triple the tax-free threshold and reform the Low Income Tax Offset

2011-12 MYEFO

  1. Abolish the Superannuation Guarantee maximum age limit
  2. Establish a Tax Studies Institute

2012-13 Budget

  1. Reform living-away-from-home allowances and benefits
  2. Better target the employment termination payment tax offset
  3. Consolidate dependency offsets
  4. Phase out the Mature Age Worker Tax Offset
  5. Reform airline transport fringe benefits
  6. Replace Education Tax Refund with the Schoolkids Bonus
  7. Loss carry-back
  8. Reduce duty free allowance for cigarettes
  9. Reduce the tax concession for very high income earners contributing to superannuation

2012-13 MYEFO

  1. Reform 'in-house' fringe benefits


  1. Introduce cash bidding for offshore petroleum exploration rights

A Shared Responsibility

Tax reform isn't exclusively the job of the Federal Government. All levels of government must do their share of the heavy lifting – a point I'll be making to my state and territory counterparts tomorrow when I meet with them for the Standing Council on Federal Financial Relations. As the Henry review made clear, the states have both some of the nation's least and most efficient taxes. A prime example of a damaging tax is stamp duty on home sales, which discourages Australians from relocating for work opportunities and makes it much harder for people to upsize or downsize as their family circumstances change. In this regard, the ACT Government is showing what can be achieved with its plan to phase out stamp duty over time. It's getting rid of this inefficient tax by reforming its own tax base, rather than expecting somebody else to foot the bill.

Certainly the Federal Government doesn't support hitting those who can least afford it to bankroll somebody else's tax cut. That's why we've so plainly ruled out either raising the rate or broadening the base of the GST. It's wrong to pretend that jacking up the GST is the holy grail of tax reform. While it has become an accepted part of the tax mix and its integrity should be protected, the fact is it is a regressive tax – those on lower incomes pay a larger proportion of their incomes on it than those on higher incomes. As the chart below shows, extending the tax on food, health and education would hit those on the bottom 20 per cent of incomes much harder. It's true the impact could be eased through household compensation, but once you do that there's not much money left over. Many people forget the original GST package required around $20 billion in compensation in its first full year of operation. In its current form, the GST has provided a steady stream of income for the states, with annual revenue almost doubling over the past decade to $48 billion. As the Federal Government's record demonstrates, there are plenty of other things to do in the area of tax reform without hitting those who can least afford it with more GST.

Spending on goods and services by gross income quintile

Chart: Spending on goods and services by gross income quintile

As the Australia in the Asian Century White Paper makes clear, tax reform is one of the key ways we can help our workers and our businesses take advantage of the opportunities unfolding in our region. I saw some of those opportunities first hand during the week when I visited India. When the Government talks about the Asian Century, some people think only of China. While China is a central player in the changes underway in our region, it's important not to overlook the stunning evolution occurring in the Indian economy. Australia's annual trade with India has more than doubled over the past six years to around $20 billion, and it's likely to double again to $40 billion by 2015. India's rapidly expanding middle class will increasingly demand high-end goods and services, and Australia is in the box seat to meet that demand.

On Friday, the OECD highlighted these sorts of opportunities in our region in its latest economic survey of Australia. Although the OECD notes we're not immune from risks in the global economy, it says our fiscal consolidation is appropriate for our economy and helps reduce pressure on interest rates. It also commends Australia's solid growth, low unemployment, contained inflation, sturdy public finances and our "exemplary handling" of the economy during the GFC – a combination of factors that puts us in a league of our own. Specifically, the report says:

"With 21 years of uninterrupted growth Australia stands out among OECD countries. This performance has been sustained by sound policies and, more recently, booming demand for commodities from Asia."

"Growth strengthened in 2012, and the outlook is positive, even though there are mainly negative risks stemming from the external environment, to which Australia is however less vulnerable than many other OECD countries."

Preparing for Future Challenges

As I do every year around this time, I'm inviting all Australians to have their say on next year's Budget by submitting their ideas. Input from right across the community is an important part of the budget process. Of course – as I've discussed today – everyone needs to keep in mind the pressure on revenues and this Government's strong commitment to fiscal discipline. That means proposals for budget spending should ideally be accompanied by proposals for equivalent savings. This Government will keep its focus on finding targeted and responsible savings to fund priorities and maintain Australia's strong fiscal position.

Wayne Swan
Deputy Prime Minister and Treasurer of Australia