Overview
It is said that a week is a long time in politics. What a difference a year makes to Australia’s economic outlook.
Cast your mind back to this time last year. In 2007, then Treasurer Peter Costello delivered a Budget where Treasury’s coffers overflowed with company tax revenues, returning much of this revenue windfall through personal income tax cuts. The macroeconomic outlook was shaped by expectations of continuing strong economic growth, both locally and globally, and inflation was thought to be well and truly contained.
The economic environment for Treasurer Swan’s first Budget could scarcely be more different. Headline inflation, currently 4%, is now the highest in 16 years. And while the economy is expected to continue to expand, growth is now a more demure 2.75%, a full percentage point down on the previous Budget forecast of 3.75%.
Table 1: Key 2008 Budget outcomes
 | 2007-08 | 2008-09 |
| Budget surplus* ($bn) | 16.8 | 21.7 |
| Percentage of GDP | 1.5% | 1.8% |
| GDP growth (real) (percent) | 3.5% | 2.75% |
| Employment growth (percent) | 2.5% | 1.25% |
| Wages growth (percent) | 4.25% | 4.25% |
| Consumer Price Index | 4% | 3.25% |
| Unemployment (percent) | 4.25% | 4.5% |
* underlying cash balance
Countervailing forces
Australia is sometimes said to have a two speed economy, referring to the resource-boom states of Queensland and Western Australia, and the less bouyant economies of the other states.
We now confront a world economy with similar traits. Globally, the world economy is forecast to grow at a healthy 4% in 2008-09. This masks a significant structural divide between the BRIC economies (Brazil, Russia, India and China), which in 2007 grew by nearly 10% and contributed 42% of world growth; and the G3 economies (US, the Euro area, and Japan) which collectively will grow at less than 2% this coming year.
This is pulling Australia in conflicting directions. Our economy is not immune from the slowdown in (mostly) developed economies caused by turmoil in credit markets and the collapse of securitised lending. So-called ‘liquidity hoarding’ has, and will continue to, result in reduced availability of credit, and increased financing costs to businesses as well as households.
Concurrently, Chinese and Indian demand for minerals and commodity imports shows little sign of moderating, pushing Australia’s terms of trade to levels not seen since the mid-1950s.
It is these countervailing forces which shape the economic outlook for the new Federal Government’s Budget.
Treasury is projecting that Australia’s economy will grow by 2.75% in 2008-09, before rebounding to an annualised growth rate of 3% for the remainder of the Budget forecast period.
The mild slowdown in economic growth is mostly a result of a slowing in the growth contribution of household consumption. In turn, this reflects the effects of recent increases in official interest rates and an overall dampening of consumer sentiment. Public expenditure will also make a smaller contribution to growth in 2008-09, as the Federal Government reduces its rate of spending growth to 1.1%.
Exports contribution to growth is expected to increase in 2008-09, notwithstanding the continued strength of the Australian dollar.
The Federal Government has identified inflation as its number one priority. From over 4% presently, Treasury is forecasting inflation of 3.25% in 2008-09, falling to 2.5% for the balance of the Budget forecast period.
At first blush the Budget makes a solid contribution to reducing inflationary pressures. The 2008-09 Budget surplus of $21.7 billion is equivalent to around 1.8% of GDP, representing a mild fiscal tightening when compared to a 2007-08 surplus of around 1.5% of GDP.
However, the $55 billion budget centrepiece "Working Families Support Package” will do little to improve Australia’s poor rate of savings. A safe assumption is that virtually all of this package will end up as increased household spending, putting pressures on an economy already running up against capacity constraints.
Further, one of the Budget’s few truly new announcements was the creation of a series of new "National Building” funds, including the "Building Australia Fund”, "Health and Hospitals Fund” and "Education Investment Fund”. These Funds would be established with seed capital from the 2007-08 and 2008-09 Budget surpluses, essentially redirecting these amounts from the already established Future Fund.
The $40 billion National Building funds will provide capital for national investment priorities and reforms. Over the longer term, the projects and reforms supported by these funds will boost Australia’s skills and the productive capacity overall. In the short term, the risk is that redirecting Budget surpluses to new fixed asset creation will fan inflationary flames in infrastructure markets already stretched by record private sector and state government capital programs.
The bottom line
The new Federal Labor Government’s first Budget will likely be warmly received by the community. The Budget ‘pain’ is comparatively slight and shared, and the immediate benefits to Treasurer Swan’s "working families” are widely distributed.
Measured against the Government’s self-stated target of inflation control, the report card for the Budget is more mixed. The strong surplus presents a picture of fiscal restraint, but cast against this is a significant program of new infrastructure and other spending with the potential to, at least in the short term, put upward pressure on inflation and interest rates.
Reviews of the Australian Tax System - a brief history
Australia has seen many tax reviews over the years. Few satisfy the description of a "root and branch” tax reform proposed by the Labor Government in its first Budget, but nonetheless the list below of major events indicates that ours is a much scrutinised tax system.
- 1901 - Deliberations leading to Federation result in uniform federal tariff and excise duties powers ceded to the Commonwealth
- 1922 - Commonwealth Royal Commission (the Kerr Commission)
- 1933-34 - Commonwealth Royal Commission (the Ferguson Commission)
- 1950-54 - Spooner Committee issues a series of Reports
- 1954-55 - Commonwealth Committee on Rates of Depreciation (the Hulme Committee)
- 1959-61 - Ligertwood Committee
- 1975:
- Commonwealth Taxation Review Committee Report (the Asprey Committee)
- Committee of Inquiry into Inflation and Taxation (the Mathews Committee)
- 1985 - Labor Government releases Reform of the Australian Tax System: Draft White Paper, followed by the National Tax Summit held in Canberra during July. In September the Government announces a raft of major tax reforms.
- 1991 - Joint Committee of Public Accounts review of the administration and operation of the Australian Taxation Office
- 1996 - Productivity Commission report supports the introduction of a broad-based consumption tax and radical reform of Federal State finances
- 1998 - Tax Reform: Not a New Tax a New Tax System, circulated by the Treasurer, Mr Peter Costello
- 1999 - Review of Business Taxation (the Ralph Committee) publishes
A Tax System Redesigned
- 2002 - Board of Taxation publishes two reports:
- Tax Value Method
- Taxation of Discretionary Trusts
- February 2003 - Board of Taxation Report Review of International Taxation Arrangements
- Current Board of Taxation Reviews:
- Review of the Anti-Tax-Deferral Regimes
- Taxation Treatment of Off-Market Share Buybacks
- Consultation on the Application of Consistent Self-Assessment Principles
- Eligible Investment Rules for Managed Funds
- Review of the Tax Arrangements Applying to Managed Investment Trusts
Who’s who on the Review Panel - Australia’s future tax system
- Dr Ken Henry AC - Chairman and current Secretary to the Treasury. Widely respected, Dr Henry has worked closely on previous tax reform initiatives, particularly the 1985 tax reforms of the Hawke Government with Paul Keating as Federal Treasurer.
- Mr Greg Smith - Adjunct Professor in Economic and Social Policy with the Australian Catholic University. He has previously worked as a top ranking Treasury official with a focus on tax matters and is a Member of the Board of Governors of the Australian Tax Research Foundation.
- Dr Jeff Harmer - Secretary of the Department of Families, Housing, Community Services and Indigenous Affairs. Has worked in a wide range of senior roles in the Public Service, encompassing health, regional development, social security, education, science and training.
- Ms Heather Ridout - Chief Executive of the Australian Industry Group. Heather is a well known and vocal commentator on business and public policy matters. The AIG has recently called for a range of business tax changes, including a phased reduction in the company tax rate from 30% to 25%.
- Professor John Piggott - University of New South Wales. He has a long standing interest in issues relating to retirement and pension economics and finance.
