PROTECTING PROSPERITY: WHY WE NEED TO TALK ABOUT TAX - PWC
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Protecting prosperity:
Why we need to talk
about tax
July 2013
Australia faces a historic choice
in the years ahead. It could cut
government services radically,
it could build tax revenues by
incremental change, or it could
prioritise growth through
carefully targeted expenditure
cuts and tax reform.
Australia’s challenge
After 22 years of continuous economic growth, This conversation is overdue
Australia now faces the risk of falling incomes and
increasing government debt. This is an issue that will not go away. As part of a
broader community discussion about the challenges
PwC estimates that the combined annual deficits of
Australia faces, we need an informed and intelligent
Australian governments will rise:
conversation on tax. Leaders of civil society, business,
• from $27.4bn (1.9% of gross domestic product unions and the public policy community must drive
[GDP]) in 2011-12 to $213.5bn (3.5%) by 2039-40 this conversation if we are to realise the benefits
and to $583.1bn (5.9%)by 2049-50. across all parts of society. The overall objective is two-
And our governments’ debt levels as a proportion fold: economic growth, and enhancing the wellbeing
of GDP will rise: of the Australian public.
• from 12.1% in 2011-12 to 32.9% by 2039-40 This report is PwC’s contribution to the debate. In it,
and to 77.9% by 2049-50. we do not recommend an optimal package of taxes.
Rather, we seek to emphasise that there is scope for
These trends are unsustainable as the population ages. raising government revenues while maintaining, or
Australian governments risk not being able to meet even encouraging, continued economic growth and
the key needs of our community and a further slide a fair and equitable approach to the vulnerable in
into debt. And higher debt at the Commonwealth level our community.
would mean that another shock like the GFC in the
next few years could see its debt climb to 30% of GDP
by 2025-26.
We believe there is a clear need for comprehensive tax
reform – done the right way. The ‘right way’ means Luke Sayers
increasing those taxes that have the least effect on CEO, PwC
investment and employment, and at the same time
reducing reliance on taxes that distort incentives
to work, invest and transact business. It also means
addressing those factors which increase the complexity
of the tax system and the cost of compliance.
Such a reform would complement a reinvigorated focus
on productivity, and higher workforce participation
from older Australians and women with children.
And a good, comprehensive tax system needs to be
equitable. Any reform will need to include carefully
targeted compensation packages and an examination
of personal tax, company tax rates and concessions,
retirement funding, retirement age, and welfare
transfers.
2 Protecting prosperity | Why we need to talk about taxAcknowledgements
We would like to acknowledge the following people who Tax Experts Group
provided input and contributions to the matters discussed in
this publication: Comprising the following Heads of Tax:
Adele Raj-Manning, Lion
Advisory Panel
Anne Richardson, Asciano
David Flanagan, Chairman, Atlas Iron
Anthony Portas, Anglo American Metallurgical Coal
Dr Lynne Williams, Economic consultant and board director
Darren Day, Woolworths Limited
John Daley, Chief Executive Officer, Grattan Institute
Frank Drenth, Corporate Tax Association of Australia
Launa Inman, former Chief Executive Officer, Billabong
John Condon, BP Australia
Louise Tarrant, National Secretary, United Voice
Kathryn Davy, News Limited
Mike Callaghan, former Deputy Secretary, Australian
Treasury Stephen Green, ANZ (now retired)
Nicola Ballenden, Representative, Brotherhood of Tony Merlo, BHP Billiton
St Laurence
While the guidance provided by the Advisory Panel and Tax
Professor John Freebairn, Ritchie Chair, Department of Experts Group has been most welcome, PwC acknowledges
Economics, Melbourne University sole responsibility for the final document and recognises
that members of the Advisory Panel / Tax Experts Group
Robert Neale, Chief Executive Officer, New Hope
may not agree with all matters referred to in the publication.
Corporation Limited
Information presented in this report refers to PwC analysis.
Ross Barker, Chief Executive Officer, Australian Foundation
Where indicated, this refers to PwC’s projections of economic
Investment Company
growth and government finances, which have been estimated
Toby Hall, Chief Executive Officer, Mission Australia at both the state and national levels. These estimates are
based on the methodology used in the Commonwealth
Government’s intergenerational report, underpinned by the
‘three Ps’ of population, participation and productivity. The
long-term projections of economic growth and government
finances take current government economic and finance
forecasts as a base. Trend growth rates over the longer term
are a function of the historical data and the assumptions are
based on data from official sources.
Protecting prosperity | Why we need to talk about tax 34 Changing the tax landscape | A case for genuine tax reform
Contents
06
Executive
15
The case for
27
Why do taxes
summary action affect economic
growth?
33
What are the
44
What could a
47
The way forward
features of a ‘good’ change in the tax
tax system? How landscape deliver?
does the Australian
system measure up?
Changing the tax landscape | A case for genuine tax reform 5Executive summary
Australia is facing fundamental
challenges in maintaining prosperity
But the community, the unions,
business and public policy specialists
The case for action
into the future. all need to be involved. They need to
Australia has enjoyed more than over
• Real income growth and strong understand the why and how of tax
22 years of largely continuous growth
budgets are at risk if productivity reform – and in particular, why it has
in real income per person (Figure 1):
stays low and export prices fall. generally failed in the past. There are
questions we need to ask, and answer, • In the 1990s and early 2000s
• An aging population will this flowed primarily from
before any decisions can be made.
progressively increase the productivity growth.
proportion of the community And above all, the overriding two-fold • From the mid-2000s, while
dependent on those who are objective – to ensure growth, and at productivity declined, this position
producing income and put pressures the same time enhance the wellbeing was maintained because the
on aged care spending. of Australians – must remain at the prices of our exports, particularly
• These factors could lead to falls in centre of the debate. minerals, rose and the prices of
real per-person income for the first our imports – such as televisions,
time in a quarter of a century, and computers and cars – fell.
unless we rebuild strong budgets,
governments might not be able to
Figure 1: Disposable income per person and GDP per person, Australia,
cushion us from the next global
annual % change
shock as they did from the GFC.
• State/territory governments in 8%
particular face a great challenge Dot-com bubble
because the demands they face have 6%
GFC
grown faster than GST revenues.
4%
• Ultimately, simply cutting waste
is not going to be enough to do
2%
everything we wish. Significant
action is required to enable 0%
governments to boost revenues and
address current deficits. -2%
Tax reform is the most comprehensive
-4%
way of addressing these issues. And if
we do it the right way – by ensuring we Asset-price bubble
-6%
lift only those taxes that have the least
1986-87
1988-89
1990-91
1992-93
1994-95
1996-97
1998-99
2000-01
2002-03
2004-05
2006-07
2008-09
2010-11
effect on economic growth, reduce our
reliance on taxes that are damaging,
and direct any compensation Disposable income per person GDP per person
measures to the most vulnerable –
Source: ABS Cat No. 5204.0
then tax reform can also help us drive
productivity growth and lift real
incomes per person.
6 Protecting prosperity | Why we need to talk about taxSince the early 1990s, governments Unless we rebuild strong budgets, the • geo-political stress in east Asia
at all levels were able to build a Commonwealth Government might as China grows in economic and
strong budget position, with low not be able to cushion us from the military strength
debt levels, due to a combination of next economic shock as it did from the • a crisis in the Middle East
asset sales, strong revenue growth GFC. A global shock in the next decade
• irrational exuberance or an asset
and some expenditure restraint. could result from:
price bubble.
However, real income growth and • the unresolved sovereign debt issues
strong budgets in the future are both in the eurozone
at risk if productivity stays low and
• soaring government debt in Japan
export prices fall. This could result
in falling real income per person for • failed attempts to control the United
the first time in a quarter of a century. States fiscal deficit
Exacerbating this problem is an aging • efforts in China to restructure its
population, which over time will economy and wind back stimulus
reduce labour market participation
rates and earnings, while at the same
time adding to government costs.
Figure 2: Primary balance: Commonwealth and state/territory
Without changes in government governments, % of GDP
spending and a broader trend towards 4%
addressing participation, productivity,
and tax reform, PwC estimates that 2%
the combined annual deficits of
Commonwealth and state/territory
governments will rise from $27.4bn in 0%
2011-12 to $213.5bn by 2039-40 and
to $583.1bn by 2049-50 (Figure 2). -2%
-4%
-6%
2001-02
2049-50
2005-06
2013-14
2017-18
2009-10
2025-26
2029-30
2021-22
2033-34
2037-38
2041-42
2045-46
Commonwealth States
Source: PwC analysis
Note: The primary balance is defined as the difference between revenues and expenditures, excluding interest
transactions. This chart uses official budget forward estimates where they are available. To this extent it relies on
budget estimates of future revenue growth and expenditure paths. It is based on an assumption of a steady 1.5%
improvement in productivity each year.
Australia has enjoyed
more than 22 years of
largely continuous growth
in real income per person
Protecting prosperity | Why we need to talk about tax 7Another shock like the GFC could Figure 3: GFC type shock in 2016-17, primary balance,
accelerate the slide towards deeper Commonwealth Government, % of GDP
government debt (Figure 3).
4%
State governments face a particular
challenge because the income they
receive from the GST and their own 2%
tax bases has grown more slowly than
the demands they face. This trend is
expected to continue into the future, 0%
without significant changes to either
the breadth of application or rate of
GST. -2%
Based on these trends, it is estimated
that total general government debt -4%
will grow for all levels of government,
with the cumulative deficits as a
proportion of gross domestic product -6%
(GDP), rising from 12.1% in 2011-
2001-02
2049-50
2005-06
2013-14
2017-18
2009-10
2025-26
2029-30
2021-22
2033-34
2037-38
2041-42
2045-46
12 to 32.9% by 2039-40, and then
to 77.9% by 2049-50. Rising net
debt levels for governments also Commonwealth: Base case Commonwealth: GFC-type shock
means increasing costs associated
with servicing interest payable on Source: PwC analysis
Note: This chart uses official budget forward estimates where they are available. To this extent it relies on
this public debt. Figure 4 shows the budget estimates of future revenue growth and expenditure paths. It is based on an assumption of a steady 1.5%
path of debt with capitalised interest improvement in productivity each year and with the addition of a GFC-type shock to revenue and expenditure.
if these costs are not met along the
way. In particular, it highlights that
debt interest payments contribute Figure 4: Total public net debt: Commonwealth and state/territory
to almost half the total liabilities (or governments, with public debt interest capitalised from 2016-17,
% of GDP
34% of GDP) by 2049-50.
80%
In this calculation, ‘interest
payments’ are based on current
interest rates and no allowance has 60%
been made for any increase which
might occur if the financial markets
40%
become less confident in Australia’s
creditworthiness or if global interest
rates increase from their historically 20%
low levels. Higher interest rates
would make Australian governments
progressively more vulnerable 0%
to interest rate shocks. Recent
experience in the European Union
shows how rapidly rising interest rates -20%
2001-02
2049-50
2005-06
2013-14
2017-18
2009-10
2025-26
2029-30
2021-22
2033-34
2037-38
2041-42
2045-46
and deepening sovereign debt can
damage business confidence in the
economy, and the need for dramatic State - Interest Commonwealth - Interest
States - Principal Commonwealth - Principal
public and private debt reduction.
Source: PwC analysis
The acceleration in deficits would
present itself as cumulative
debts building up each year –
almost doubling normal funding
requirements by 2049-50.
8 Protecting prosperity | Why we need to talk about taxA further financial shock in this decade Figure 5: Commonwealth public net debt with a GFC-type shock, including
would also bring forward Australian public debt interest capitalised from 2016-17, % of GDP
governments’ move into deep debt. In
120%
particular, sensitivity analysis shows
how vulnerable Australia could be to
100%
this type of shock, and how debt can
then increase exponentially if no action
80%
is taken to cut expenditure or boost
revenue (Figure 5). 60%
Therefore, governments at all levels
40%
will need to be very careful about
which expenditure programs they
20%
choose to support, and will also need
to focus on cutting waste. But Australia 0%
is not a big-tax, big-government
spending economy compared with -20%
other countries with the same
2001-02
2049-50
2005-06
2013-14
2017-18
2009-10
2025-26
2029-30
2021-22
2033-34
2037-38
2041-42
2045-46
standards of living (Figure 6).1
Commonwealth: Base Case Commonwealth: GFC-type shock
Source: PwC analysis
Figure 6: Government expenditures and deficits, OECD countries, 2011
Government expenditure (% of GDP)
Budget deficit (% of GDP)
Denmark
France Denmark
Finland France
Belgium Finland
Austria Belgium
Sweden Austria
Italy Sweden
Greece Italy
Netherlands Greece
Slovenia Netherlands
United Kingdom Slovenia
Hungary United Kingdom
Portugal Hungary
Germany Portugal
Israel Germany
Israel1
Spain
Spain
Iceland
Iceland
New Zealand New Zealand
Japan Japan
Norway Norway
Czech Republic Czech Republic
Poland Poland
Ireland Ireland
Luxembourg Luxembourg
OECD OECD
Canada Canada
United States1 United States
Estonia Estonia
Slovak Republic Slovak Republic
Australia Australia
Switzerland Switzerland
Korea Korea
30 40 50 60 -10 -5 0 10 20
Source: OECD 2012. OECD Economic Outlook. Volume 2012, Issue 2, No. 92
1. Some OECD countries levy a social security contribution from employers as an element of their tax system. Australia has
a Superannuation Guarantee Charge which enforces saving for retirement with limitations on early access. However the
funds raised from this charge do not move through the budget system, and at all times lie within the control of private
sector financial intermediaries, financing both public and private investment.
Protecting prosperity | Why we need to talk about tax 9Ultimately, simply cutting waste
is not going to be enough to fund
Why do taxes affect In essence, all taxes affect growth,
but some are much more negative for
everything we wish to do: rebuild economic growth? growth than others.
strong budgets; help fund community • Income taxes and means tests can
priorities like DisabilityCare Australia, Taxes are mainly used to support deter people from working at all,
education reform, and infrastructure public expenditure on services, can influence them to work less than
in our cities and regions; and lift our investment, infrastructure, education they would like, can deter them
defence investment to reflect the more and welfare. They are also used to from pursuing higher skills and even
clouded and uncertain medium-term secure equity, social or environmental cause them not to work in Australia.
strategic outlook. outcomes.
• Company taxes can cut foreign, and
In addition to making expenditure However, taxes can have a negative plausibly to some extent domestic,
cuts, if we are to prevent what effect on economic growth because investment2 and the incentive to
could become increasing long-term they affect decision-making: innovate, which in turn can cut
structural deficits growing even larger, growth, reduce productivity and
• decisions by householders to save,
governments need to boost revenues. reduce real per-person incomes.
to buy services or property, to work
If we do this the right way – that is, by or to pursue education • Taxes on transactions like stamp
lifting only those taxes that have the duty can stifle deals that would
• decisions by companies to produce,
least effect on economic growth, by have brought economic benefits to
provide jobs, innovate and invest
reducing our reliance on taxes that are all the parties involved – businesses
damaging to economic growth, and by • decisions by investors about where or households – as well as to the
ensuring any compensation measures and how to invest. community.
are targeted at the most vulnerable in • Taxes on consumption, like the
Globalisation has increased the effect
our community – then tax reform can GST, affect economic growth
of taxes on growth. It has also affected
also help us drive productivity growth less because they do not change
the stability of revenue from corporate
and lift real incomes per person. behaviour as much, and especially
sources. Countries like Australia which
are small, open economies highly so when applied uniformly to all
Such a tax reform system should also
dependent on foreign investment, goods and services.
include addressing those factors which
increase the complexity of the tax trade and skilled migration, and with • Taxes on immovable resources
system and the cost of compliance. well developed web-based commerce, – such as land tax – have low
have to be increasingly aware of the economic costs.
effect their tax mix can have on their
competitiveness.
2. The impact of company taxes on domestic investment is significantly reduced by dividend imputation which means that
domestic investors’ dividend returns are taxed at their marginal income tax rate. However, many in business also argue
that to the extent company tax reduces companies’ ability to retain funds, it can reduce investment capacity and growth in
company value, which is also of interest to those domestic investors whose principal concern is capital gains.
10 Protecting prosperity | Why we need to talk about taxGetting the structure of the tax
system right can boost growth and
What are the • Is it fair? – The aggregate tax
burden should properly reflect the
lift productivity. The Organisation features of a ‘good’ capacity to pay and be supported
of Economic Cooperation and by positive income support for the
Development (OECD) has ranked taxes tax system? How most vulnerable; people in the
from most to least growth-friendly –
with recurrent taxes on immovable
does the Australian same position should be treated in
a similar way; there should be no
property (eg land) having the least system measure up? discrimination between states and
negative effect on growth followed territories; and future generations
by consumption taxes, other property No matter how much revenue a tax should not be burdened to make
and environmental taxes, and personal system raises, a ‘good’ tax system the life of the current generations
income tax. Corporate taxes have the should meet some key tests: easier.
greatest negative effect on growth. • Does it enable healthy • Is it efficient? – All taxes damage
government? – Australians expect economic growth to some extent,
Assessments of Australia’s tax system
all levels of government to provide but some much less than others.
indicate that we are heavily weighted
a range of services, facilities and Most revenue should therefore be
towards those taxes which have a
support for the disadvantaged, and raised through those taxes which
greater proportion of welfare loss per
to have the budget strength to deal impose the smallest penalty on our
dollar of revenue collected. But taxes
with natural, economic or national economic wellbeing, are simple to
are about more than just growth,
security shocks. This requires understand and impose the lowest
and we cannot lose sight of those
an adequate revenue stream to costs to collect.
other goals.
governments.
These priorities will often compete.
• Does it support an efficient
The challenge of tax reform is to
federation? – While the
balance improvements in efficiency
Commonwealth has the most
with complementary measures to
effective capacity to raise taxes,
maintain or promote fairness and
states and territories should have
ensure the fiscal sustainability of all
access to a predictable revenue
levels of government.
stream that grows in line with the
demands for services they deliver.
No matter how much revenue a tax
system raises, a ‘good’ tax system
should meet some key tests
Protecting prosperity | Why we need to talk about tax 11The Australian system of taxes and Table 1: Assessment of Australian taxes against OECD countries4
welfare benefits is regarded as among
the more equitable of the OECD Principle Rating
countries because it generally focuses
net government support on those most Burden of tax & ability to pay
in need.
Equity Non-discrimination
Recent changes have cut back on the
support for families at income levels
Limits to inter-generational impacts
which would traditionally have been
regarded as ‘well off’. However, the tax
treatment of superannuation incomes, Economic distortion (elasticity and mobility)
indexation of pensions to earnings, and
the treatment of the primary place of Application of tax (broad)
residence for means tests has resulted
in many older ‘well off’ Australians Efficiency Effect on production
(ie with considerable assets) receiving
assistance. Those dependent on
Newstart, Job Seeker or Parenting Competitive levels of taxation
Payment, by comparison, have faced
increasing financial stress.3 Administration costs
Compared to many developed Revenue to support essential service provision &
countries and advanced developing Fiscal revenue growth over time
countries, the Australian tax system sustainability Limit vertical fiscal imbalance (VFI) between the
does not support growth as well as it levels of government
could. This is due to the large amount
Source: PwC analysis on the basis of OECD reviews of tax and growth, and the academic literature
of tax revenue generated from income
and corporate taxes, which tend to
distort incentives more than other Figure 7: Corporate tax revenue, % of total tax revenue, 2010
taxes, along with the application of
25.0
exemptions and concessions which add
administrative complexity and cost to
the tax system. 20.0
18.5
Australia draws a relatively high
proportion of its government revenue 15.0
from taxes on business activities and a
relatively low proportion from taxes on 10.0
8.6
consumption.
For example, the proportion of tax 5.0
revenue collected from corporate taxes
is much higher than the OECD average
0.0
(Figure 7). High taxes on business
Iceland
Hungary
Estonia
Germany
Austria
France
Slovenia
Spain
Netherlands
Denmark
Finland
Belgium
Poland
Italy
Turkey
Sweden
Greece
OECD
United Kingdom
Slovak Republic
Israel
Portugal
Ireland
Czech Republic
Switzerland
Canada
United States
Japan
New Zealand
Korea
Luxembourg
Australia
Norway
deter investment, encourage the
movement of activities offshore and
encourage artificial strategies to avoid
tax. Tax revenues generated from these
sources are also quite volatile across Source: OECD 2012 Revenue Statistics 1965-2011, 2012 Edition
the business cycle.
Tax revenue generated by consumption
taxes, however, is generally lower
than the OECD average (Figure 8).
However, these taxes, along with taxes
on land, are generally more stable and
encourage saving.
3. Daley, J. McGannon, C. and Savage, J. 2013. Budget pressures on Australian Governments. Grattan Institute, Melbourne
4. Traffic light reporting has been used to illustrate how Australia compares with other OECD countries with respect to the principles
of a good tax system. A green icon suggests that Australia’s tax system, or certain features of it, is consistent with or compares
well against the other OECD countries; an orange icon suggests that our tax system, or certain features of it, is not completely
consistent with the tax systems of other OECD countries; and a red icon suggests that our tax system, or certain features of it, is
comparatively worse than other OECD countries.
12 Protecting prosperity | Why we need to talk about taxWhat could a Figure 8: Consumption tax revenue, % of total tax revenue, 2010
change in the tax 60.0
landscape deliver? 50.0
Australia faces a historic choice in the 40.0
years ahead. It could cut government 31.3
services radically, it could build tax 30.0
25.7
revenues by incremental change, or it
could prioritise growth through carefully 20.0
targeted expenditure cuts and tax reform.
10.0
Poorly considered expenditure cuts and
increases to growth-distorting taxes, such 0.0
as company tax, personal income tax and
United States
Japan
Switzerland
Canada
Italy
Belgium
France
Spain
Australia
Norway
Austria
Luxembourg
Netherlands
Sweden
Germany
United Kingdom
Denmark
Finland
Czech Republic
OECD
Korea
Iceland
Slovak Republic
Ireland
Slovenia
Greece
New Zealand
Israel
Poland
Portugal
Estonia
Hungary
Turkey
Chile
Mexico
stamp duty, will reduce economic growth
and have broader impacts on the poor
and vulnerable.
With carefully targeted expenditure
restraint linked with comprehensive Source: OECD 2012 Revenue Statistics 1965-2011, 2012 Edition
tax reform, we could help rebuild
budget resilience at a state, territory
and Commonwealth level, and increase
Such changes to the tax landscape,
however, could bruise some of our
The way forward
the financial independence of states
other tax principles: Tax reform requires more than just the
and territories. There would be a boost
to economic growth, productivity and • Shifting the burden of tax to right conceptual solution. Previous
real per-person incomes if: consumption tax and land tax may efforts at tax reform have often failed
place more relative pressure on to achieve meaningful change because
• Australia relied more on
lower-income and older Australians certain elements were missing.
consumption and land taxes, and
who are home-owners.
less on corporate and personal Successful reform requires some key
taxes, stamp duty, taxation of • Rebuilding budget resilience will
mean that not all the losers from the conditions to be present. For example:
insurance, and payroll taxes in their
changes can be compensated. • a broadly based understanding
current form
• Reducing the corporate tax rate that our public finances are
• taxes were more uniformly applied unsustainable without change
with fewer exemptions and will confer some benefits on foreign
investors and on some high-wealth • public acceptance that the hard
concessions.
Australians through capital gains. work on making reductions in
These two changes – together with government expenditure has begun
expenditure restraint - have the The big question is whether the in earnest, before tax changes are
potential to address the major economic growth, private income and budget considered
and fiscal challenges facing Australia resilience gains from tax reform • public and political support
today. Any increase in GST revenue would be enough to support an for change
paid to states and territories – beyond effective strategy for protecting the
more vulnerable in our community • appropriate compensation but also
that needed to make an appropriate an acceptance that not everyone can
contribution to restoring fiscal resilience and ensuring a smooth transition.
However, it is likely that it would be made better off
– could be offset by a reduction in
be preferable to the alternatives: • a willingness to balance
Commonwealth-tied payments. This
burgeoning deficits; savage cuts competing interests
would give the states and territories
greater autonomy, provide latitude to government expenditure; or • an ability to develop an
for states and territories to reduce or uncoordinated increases in taxes emerging and at least tacit
improve the targeting of inefficient which distort behaviour and impede bipartisan consensus.
taxes (eg stamp duty and payroll economic growth.
None of these conditions is easy to
tax), and offer scope for reducing
achieve but they can be established
Commonwealth-state overlaps. It
with an understanding of the
would also free up revenue for the
problems tax reform should address
Commonwealth to fund appropriate
and an emerging consensus on the
compensation through the personal
way forward.
income tax and transfer5 systems to
offset the effects of a broader or higher
GST on the most vulnerable.
5. The transfer system consists of government welfare payments and tax relief provided to individuals and households.
Protecting prosperity | Why we need to talk about tax 13An important concept, but one that A lesson from Australia’s major • the opportunities to lift growth,
is difficult to explain, is that it is economic reforms is that public and productivity and participation, and
Australian households who bear the political will for reform is possible, to secure government finances,
principal tax burden, even for those but only if the timeframes are realistic through comprehensive tax
taxes which are ostensibly focused on and there is a body of business, civil reform and targeted government
business. This is because business will society and public policy leadership expenditure restraint
often be competitively forced to pass with a clear strategy for change. • the implications for the vulnerable
those taxes on through prices, which That groundswell of opinion will and lower-income groups, as well
affect consumers, or through lower only emerge from an open and as higher income Australians and
wages or lower employment. Taxes respectful conversation among all foreign investors, of comprehensive
can lead to Australia failing to secure the stakeholders to design a tax and reforms in tax and government
foreign investment, with impacts on transfer landscape that will build expenditure constraint
employment and income, which will growth and protect equity.
• the means to ensure that all
affect households.
Australians, over time, can share in
Reform is best achieved if any changes Questions we need the benefits of higher growth, while
protecting the vulnerable and lower
are part of a comprehensive package
of tax and transfer or welfare payment
to answer income groups in the transition.
changes. It is also necessary that it be
Leaders of civil society (including
seen as part of a coherent strategy for
welfare groups and unions), business
lifting incomes and resilience which
and policy makers must be engaged
also involves restraint in government
in sustained conversation on a
expenditure. Public acceptance
comprehensive approach to reform. If
of reform, as well as business
we are to realise the potential benefits
confidence, is damaged by continual
for Australians across all parts of our
ad hoc changes to taxes, allowances,
society, that conversation needs to
investment rules and superannuation.
focus on some key questions:
Although there is now some • the challenges facing government
acknowledgement of the importance spending and revenue as the
of these issues, in the past political community ages and the mining
leaders have found tax reform a boom declines
difficult discussion to sustain given • the need to sustainably lift
the complexity of the issues, the productivity and the workforce
indirect and dispersed nature of many participation of older Australians
of the benefits, and the clear and and women with children
direct effect on the potential losers.
This has sometimes led to proposals
being rushed and options prematurely
foreclosed. As a result, Australia’s
record of comprehensive tax reform
has been poor.
14 Protecting prosperity | Why we need to talk about taxThe case for action
Key messages could see falls in real per-person
income for the first time in a quarter
• If we do this the right way – by
lifting only those taxes that have the
• Australia has enjoyed more than 22 of a century, and unless we rebuild least effect on economic growth,
years of largely continuous growth strong budgets, governments might reducing our reliance on taxes
in real per-person incomes: not be able to cushion us from the that are damaging and targeting
–– In the 1990s and early 2000s next global shock as they did from any compensation measures at the
this flowed principally from the GFC. most vulnerable – then tax reform
productivity growth. • State and territory governments in can also help us drive productivity
particular face a great challenge growth and lift real incomes per
–– From the mid-2000s, however,
because the income they receive person.
productivity levels declined and
this position was only maintained from the GST has grown more
because the prices of our exports, slowly than the demands they face.
particularly minerals, have risen • Ultimately, simply cutting
and the prices of our imports – waste is not going to be enough
such as televisions, computers to do everything we wish:
and cars – have fallen. rebuild strong budgets, help
• Since the early 1990s to the mid- fund community priorities like
2000s, governments at all levels DisabilityCare, education reform,
were able to build a strong budget and infrastructure in our cities
position, with low debt levels due and regions; and lift our defence
to a combination of asset sales, investment back to the long-term
strong revenue growth and some average.
expenditure restraint. • Significant action is required to
• However, following the GFC this enable governments to boost
position changed dramatically, with revenues and address current
the Commonwealth Government, deficits. Tax reform is the most
and many state and territory comprehensive way to address these
governments, now in deficit. issues.
• Real income growth and strong
budgets are at risk if productivity
stays low and export prices fall. We
Significant action is
required to enable
governments to boost
revenues and address
current deficits.
Protecting prosperity | Why we need to talk about tax 15Is Australia’s • As our population grows older, fewer
people as a proportion of the total
balances have become heavily
reliant on revenue boosted by
golden age at risk workforce are willing or able to work. cyclical factors and the continuation
This is beginning to happen now of ‘good times’ associated with
of ending? as the eldest of the baby boomer strong commodity prices.10 With the
generation reach retirement age, easing of commodity prices,
Australia has had more than 22 years and will speed up in the years ahead. there is further risk to the ability
of almost continuous growth in real This reduced workforce participation of governments to bring budget
incomes per person. Continuous means lower growth in the economy deficits back into line.
economic growth over such a long overall and lower per-person incomes. • A range of expenditure
timescale is the envy of most advanced
• GST revenue, on which Australia’s commitments were entered into
countries. This growth has been
states and territories rely heavily, has on assumptions of revenue streams
sustained in spite of external shocks
not recovered since the GFC. This from carbon pricing and the
like the Asian Financial Crisis, the
is in part because the community Minerals Resources Rent Tax, which
technology share market collapse, the
is saving more. While this is a good are not likely to be met.
GFC and the deep problems in the
thing, it means lower revenue for the • Flat or volatile revenue growth
eurozone.6 Even the dip in real per-
states. Also, where consumers are at the same time as there are
person incomes at the height of the GFC
spending more, an increasing share expectations of increased funding
was modest and short-lived (Figure 9).
of this consumption is in areas not for critical services means that
In part, we recovered so quickly covered by the GST, such as private it will be hard for all levels of
from the GFC because Australian health, private education, fresh government to rebuild the strong
governments were able to put in place food, and (less importantly) small fiscal position that the times call for.
substantial discretionary stimulus in online purchases, further dampening
both fiscal and monetary policy, while growth. While assessing the efficiency of
maintaining a relatively strong fiscal • The relatively strong budget current spending and cutting wasteful
position.7 This was because they went position at the Commonwealth spending will provide one part of the
into the GFC with a budget surplus and level entering the GFC was not solution, it is unlikely to adequately
negative net debt. Australia also was underpinned by sustainable address current, and more particularly
helped by strong stimulatory action by expenditure and revenue future, deficits.
China, which maintained the demand arrangements. Instead, budget
for our exports, particularly minerals.8
Figure 9: Disposable income per person and GDP per person, Australia,
However, there are a number of annual % change
reasons to believe that there are risks
to continued growth in per-person 8%
incomes or government budgets. Dot-com bubble
6%
The main causes for concern are: GFC
• Our productivity – growth in the 4%
value of what we produce for each
hour we work and each dollar we 2%
invest – has been low over the past
decade, until very recently when 0%
it rebounded somewhat. Without
strong productivity growth, it is -2%
hard to sustain real wages and
-4%
employment growth.
• Prices for Australian exports, -6%
Asset-price bubble
particularly minerals exports, have
1986-87
1988-89
1990-91
1992-93
1994-95
1996-97
1998-99
2000-01
2002-03
2004-05
2006-07
2008-09
2010-11
either stabilised or reduced relative
to their peak, and are expected to
fall further.9 Disposable income per person GDP per person
Source: ABS Cat No. 5204.0
6. Commonwealth of Australia. 2010. Australia to 2050: Future challenges. January 2010. Canberra: Australia
7. McDonald, T., and Morling, S. 2011. ‘The Australian Economy and the global downturn. Part 1: Reasons for resilience’. Economic Roundup
Issue 2, 2011. Canberra, Australia
8. Connolly, E., and Orsmond, D. 2011. ‘The Mining Industry: From bust to boom’. Research Discussion Paper. Reserve Bank of Australia, Sydney
9. BREE. 2013. Resources and Energy Quarterly. March Quarter 2013. BREE, Canberra
10. Maher, Sid. 2013. ‘Decade of deficits’ puts focus on spending cuts, says new economic modelling’. The Australian. 4 March 2013
16 Protecting prosperity | Why we need to talk about taxRisks to per-person Figure 10: Contribution to growth in average incomes, by decade
income growth – 4 4
productivity, prices 3 3
Percentage points, annual average
and participation
Percentage points, annual average
2 2
We can get a better sense of the
challenges ahead by looking at why we
have grown so strongly in the past. 1 1
Real per-person incomes provide a
useful measure of societal wellbeing 0 0
or living standards and are directly
related to the purchasing power of
Australians. A number of factors -1 -1
1970s 1980s 1990s 2000s
directly influence growth in real
per-person income, including Labour productivity Labour utilisation Terms of trade
productivity, terms of trade (the price Foreign income flows GNI per person
for our exports compared to what
we pay for imports) and labour force Source: Australian Treasury calculations based on ABS cat. no. 5206.0, 6202.0 and unpublished ABS data
Dolman, B and Gruen, D. 2012. ‘Productivity and Structural Change’. 41st Australian Conference of
participation. Economists. 10 July 2012
The picture over the past four decades
is very clear (Figure 10). There was
strong productivity growth in the The productivity story Productivity matters because it
1970s offset by a decline in labour ‘grows the cake’ per person, and
force participation as the effect of very Productivity measures the volume of assumptions regarding productivity
low birth and immigration rates in the production or output – that is, goods levels significantly affect forecasts
great depression years outweighed the and services – for a certain volume of economic growth. It does not
beginning of the post-war baby boom. of input (generally hours worked).11 guarantee real wage rises, but it
In the 1980s, productivity slumped Productivity growth occurs when creates the room for real wage rises
but this was offset by the net impact the volume of outputs increases for without cutting job growth.
of the baby boomer generation which the same amount of work hours, and
generally this can be linked to: During the 1990s, productivity growth
supported workforce growth. Almost
played a significant role in driving real
all the growth in real per-person • development and use of new
per-person income growth and it is
incomes in the 1990s can be explained technologies (innovation/research
widely recognised that this surge in
by productivity growth. As we reached and development, and capital
productivity was a result of economic
the 2000s, productivity growth once investment)
reforms introduced in the 1980s and
again slipped to low levels but this time • investment in capital and fixed 1990s.12 These reforms removed tariffs
real incomes were supported by strong resources (eg plant, equipment) and subsidies, broke up monopolies,
terms of trade underpinned by the which enable labour to produce increased competition and also sought
positive surge in minerals prices and more, for less effort to improve work practices. They
falling cost of imported products. • workforce education and skills resulted in direct productivity gains,
• the effective organisation of the such as better utilisation of labour and
factors of production (labour, capital, as these factors of production
capital and fixed resources such moved to sectors with higher returns
as land) and growth prospects. Indeed,
productivity performance, as measured
• relocation of production and
through real GDP per hour worked,
employment from less productive to
increased during the 1990s, exceeding
more productive options.
the long-term average (Figure 11).
11. PwC. 2012. Productivity Scorecard. September 2012. The PwC Productivity Scorecard is a quarterly analysis of labour
productivity by state and territory and across 16 key sectors. Copies of the publication are available at:
http://www.pwc.com.au/consulting/publications/productivity-scorecard-series.htm
12. Parham, D. 2012. Australia’s Productivity Growth Slump: Signs of crisis, adjustment or both?, Visiting Researcher Paper,
Productivity Commission, Canberra; Megalogenis, G. 2012. The Australian Moment. Penguin Australia
Protecting prosperity | Why we need to talk about tax 17Productivity performance in the Figure 11: Australia’s labour productivity: Real GDP per hour worked13
2000s has been quite different, with
productivity levels actually falling 5%
below the long-term average. This
Average: 1990s (2.1%)
can be attributed to the fading effect 4% Average: 2000s (1.4%)
of earlier micro-economic reforms,
Average: 1980s (1.3%)
along with heavy investment in mining
3%
development and infrastructure in
power, water and communications.
These investments take a long time 2%
to pay off – for example, desalination
plants started during the millennium 1%
drought will not offer any real return
unless they are needed again in a 0%
future major drought. Huge mining
Average: Long run (1.5%)
developments also take time to -1%
produce a return, and higher mineral
1980-81
1982-83
1984-85
1986-87
1988-89
1991-92
1993-94
1995-96
1997-98
1999-00
2001-02
2003-04
2005-06
2007-08
2009-10
2011-12
prices have encouraged lesser quality
mineral resources to be developed,
requiring more investment per tonne
Source: ABS Cat No. 5206.0 and 6202.0
of product.
Productivity levels were also much
lower than the United States Figure 12: Australia’s labour productivity relative to the
(Figure 12), along with a large number United States (%)
of Western European countries and a
94%
growing number of Asian economies.14
While there have been seven quarters 92%
of stronger productivity growth in
the past two years, this is in part a 90%
cyclical rebound (the productivity
series is quite volatile over short 88%
periods). Partly it reflects the lag
86%
between major capital investments in
the mining sector and the increased
84%
production and revenue that they are
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
now generating. It also likely reflects
the shake-out of the lowest performing
firms in the manufacturing and Source: The Conference Board Total Economy Database™, January 2013, http://www.conference-board.org/data/
economydatabase/
services sector placed under pressure
by the high Australian dollar. There is
insufficient evidence to conclude that
we have moved to a sustained higher
productivity growth path – a suitably
conservative assumption would be
to use an average of the productivity
series over the past decade and a
half. This would produce an annual
productivity growth rate of 1.5%,
higher than the long-term average,
but much lower than the 1990s
productivity surge.
13. Australian Bureau of Statistics, 2012. Cat. 5260.0.55.002 Estimates of Industry Multifactor Productivity,
Australia: Detailed Productivity Estimates. [Online] Available at: http://www.abs.gov.au/AUSSTATS/
abs@.nsf/Lookup/5260.0.55.002Main+Features12011-12?OpenDocument. [Accessed 3 March 2013]
14. Eslake, S. 2011. Productivity: The lost decade. Reserve Bank of Australia, Sydney
18 Protecting prosperity | Why we need to talk about taxThe export price story The population and Estimates of economic growth and
per-person incomes are quite sensitive
While this deterioration in Australia’s participation story to small changes in workforce
productivity performance during the The population is aging, and birth participation rates. In the years ahead,
2000s could have seen reductions rates, while they rebounded in the first the impact of population aging on
in the living standards of Australian decade of the 21st century, are now workforce participation is expected
citizens, real per-person incomes stable. These factors affect workforce to accelerate if there are no changes
continued to grow. This was due to participation rates and therefore affect to the timing of access to pension
a surge in Australia’s terms of trade economic growth. entitlements and superannuation.
to their highest level in at least 140 Already, the participation rates of older
years, underpinned by a strong Over the past few decades, labour workers (aged over 55) and women
resources sector, which offset declining participation rates have been might have reached a plateau.20
productivity levels.15 At the same time, increasing and actually peaked around However, a finer disaggregation of age-
the value of the Australian dollar 2010. This was partly due to a higher specific participation rates might tell a
relative to the United States dollar proportion of the population in the more optimistic story of the prospect
and the currencies of other advanced prime working years of life, along of a larger proportion of older people
economies also surged. with higher labour force participation continuing to work into their later 60s
by women. It also reflected increased and early 70s.21
Our export prices have now stabilised participation by older people, partly as
or started to fall so they are no longer a result of decisions to defer retirement While there is some uncertainty
expected to lift our real incomes.16 following the GFC, and in part because regarding movements in participation
Budget forecasts assume that terms of improving health among older rates, it is expected that demographic
of trade will decline from their peak Australians. The combination of change will, in the absence of
by 9% to 2014-15 and 16% to 2023.17 increased workforce participation by interventions, be a drag on economic
Despite falling commodity prices and women and older workers in the short growth, growth in per-person incomes
terms of trade, the Australian dollar term effectively reduced the impact of and government revenues at all levels.
has until recently, remained defiantly the aging of the population on per- Moreover, it will simultaneously
high, significantly affecting trade- person income levels.19 increase demands for pension, aged
exposed sectors of the economy. care and health expenditure.22
These factors, combined with low (or
declining) productivity performance,
reductions in workforce participation
associated with an aging population,
and the absence of productivity-
enhancing reform measures, mean
that per-person incomes may
fall for the first time in nearly a
quarter of a century. Accordingly,
in line with forecast lower terms of
trade, any future growth in living
standards is expected to be driven by
productivity growth.18
15. Eslake, S. 2011. Productivity: The lost decade. Reserve Bank of Australia, Sydney
16. Kent, C. 2013. ‘Reflections on China and Minister Investment in Australia’ Address to the Committee for
Economic Development Australia. Perth, 15 February 2013; Gruen, D. 2012. The Importance of Productivity.
Productivity Commission-Australian Bureau of Statistics, Productivity Perspectives Conference,
20 November 2012
17. Treasury. 2010. Mid-year economic and fiscal outlook (MYEFO). The Treasury, Australia. Accessed on
May 2013. [Accessed at: http://budget.gov.au/past_budgets.htm]
18. Parkinson, M. 2012. ‘Challenges and opportunities for the Australian Economy. Speech to the John Curtin
Institute of Public Policy, Breakfast Forum, 5 October 2012
19. Reserve Bank of Australia. 2013. ‘Box C: The Labour Force Participation Rate’ Statement on Monetary
Policy. Sydney
20. Reserve Bank of Australia. 2013. ‘Box C: The Labour Force Participation Rate’ Statement on Monetary
Policy. Sydney
21. Daley, J., McGannon, C., and Savage J. 2013. Budget pressures on Australian governments. Grattan
Institute, Melbourne
22. Daley, J., McGannon, C., and Ginnivan, L. 2012. Game-changers: Economic reform priorities for Australia.
Grattan Institute, Melbourne
Protecting prosperity | Why we need to talk about tax 19Conclusion per-person incomes, and “in the long
run, productivity growth – producing
Fiscal challenges
The continuation of strong real per- more from the same inputs – is the only for Australian
person income growth is critical for sustainable way for future generations to
ensuring high living standards in enjoy higher living standards”.24 governments
the future. Although strong export
prices and falling import prices have We also have some capacity to influence During the 1990s and into the 2000s,
enabled real incomes to grow despite workforce participation by older Australia’s government fiscal balances
falling productivity levels, these two Australians and women. This would were rebuilt to a strong position,
factors are substantially beyond our require new incentives through changes largely due to asset sales and strong
national control, being a function of to childcare support, effective tax rates, tax revenues. In the years before the
global movements in prices and global and timing of access to superannuation GFC, rapidly rising commodity prices
minerals demand and production.23 and the aged pension.25 provided a major boost to company
Commodity prices have already stalled. profits and wages growth in resources
and in resources-related industries.
Productivity, on the other hand, is This, combined with strong asset
at least partly within our control. price growth, a maturing capital gains
Rebuilding productivity growth through tax system, and strong household
targeted reforms will help Australia consumption growth, meant strong
cope with shocks, including from the growth in tax receipts. Governments
possible decline in our export prices, also felt confident enough to provide
and will offset the impact of an aging reductions in income tax rates, despite
population. Addressing productivity the fact that structural balances might
levels is therefore critical given its not have been as strong as underlying
importance for living standards and real cash balances.26
“In the long run, productivity
growth – producing more
from the same inputs – is
the only sustainable way for
future generations to enjoy
higher living standards”.24
23. With high prices for minerals come incentives for mineral resources development in other countries,
including developing countries. Future commodity prices are therefore expected to be directly affected as
new supply comes on line
24. Parkinson, M. 2011. ‘Sustaining growth in living standards in the Asian Century’. Address to the Seventh
Economic and Social Outlook Conference. Melbourne, 30 June 2011
25. Daley, J. McGannon. C and Ginnivan, L. 2012. Game-changers: Economic reform priorities for Australia.
Grattan Institute, Melbourne
26. Parliamentary Budget Office. 2013. Estimates of the structural budget balance of the Australian Government:
2001-02 to 2016-17. Parliament of Australia, Canberra
20 Protecting prosperity | Why we need to talk about taxIt was this strong public sector Figure 13: Primary balance: Commonwealth and state/territory
balance sheet that provided the governments, % of GDP
Commonwealth Government with 4%
the flexibility to respond to the GFC
through discretionary stimulus,
without exposing Australia to undue 2%
credit risk. Even today, Commonwealth
finances are strong and the extent 0%
of confidence in Australia’s public
finances continues to be reflected in
-2%
Australia’s AAA credit rating.27
However, governments at all levels are
-4%
facing a challenging situation.
Increasing budget -6%
deficits for Australian
2001-02
2049-50
2005-06
2013-14
2017-18
2009-10
2025-26
2029-30
2021-22
2033-34
2037-38
2041-42
2045-46
governments
Commonwealth States
The Commonwealth Government is
Source: PwC analysis
now operating a budget deficit and
Note: The primary balance is defined as the difference between revenues and expenditures, excluding interest
has been for the past four years, due transactions. This chart uses official budget forward estimates where they are available. To this extent it relies on
to a range of factors including the budget estimates of future revenue growth and expenditure paths. It is based on an assumption of a steady 1.5%
improvement in productivity each year.
GFC and a reduction in company tax
and capital gains tax. While our deficits
are comparatively low when compared the Parliamentary Budget Office, • the expectation that GST revenue
to other OECD countries, a return Australia moved into a structural growth, which is critical for the
to surplus has been more difficult deficit of around 3.25% to 4.25% in states, is unlikely to rebound.
than anticipated. This position is 2011-12, and while this has recovered
somewhat, even with proposed savings The longer-term implications for
also inconsistent with the primary fiscal balances at the Commonwealth
objective of fiscal policy to maintain a it is expected to remain around 0.25%
to 1.5% of GDP in 2016-17.30 and state/territory level of an aging
budget surplus, on average, over the population (with its associated
medium-term.28 This short- to medium-term problem is demand for services) and low
Concerns over budget deficits are also exacerbated by: productivity are quite significant. PwC
amplified when considered though the • an aging population, which modelling to reflect these long-term
lens of ‘structural’ budget balances. over time is expected to reduce forces shows a growing fiscal gap at
Structural budget balances adjust for participation rates and earnings, all levels of government if expenditure
major cyclical and temporary factors and at the same time add to and revenue policies remain
and can provide an indication of the government costs unchanged, and productivity continues
health of a government’s balance at the average of the past 15 years.
• growth of per capita medical
sheet and debt sustainability. Recent expenditure driven by technology While the 2013 Budget suggests
reports have suggested that it is and rising expectations31 a return to a surplus in the years
structural rather than cyclical factors • the expectation that the strong tax ahead, modelling using the long-run
driving Australia’s increasing budget revenues of the early 2000s are underlying drivers of the economy
deficits, reflecting actions by current unlikely to return, due to a range – productivity, participation and
and former governments to reduce of factors (eg the GFC, continued population – suggests that this might
taxes (personal income taxes, fuel subdued asset price rises, and a be difficult to achieve and sustain
excises) and increased spending reduction in company tax and (Figure 13).
levels.29 According to estimates by capital gains tax revenues)32
27. Parkinson, M. 2012. ‘Challenges and opportunities for the Australian Economy’. Speech to the John Curtin
Institute of Public Policy, Breakfast forum. Perth, 5 October 2012
28. Australian Government. 2012. ‘Statement 4: Building resilience through national savings’.
Budget 2012-13. Treasury, Canberra
29. Parliamentary Budget Office. 2013. Estimates of the structural budget balance of the Australian Government:
2001-02 to 2016-17. Parliament of Australia, Canberra
30. Parliamentary Budget Office. 2013. Estimates of the structural budget balance of the Australian Government:
2001-02 to 2016-17. Parliament of Australia, Canberra
31. Daley, J. McGannon, C. and Savage, J. 2013. Budget pressures on Australian Governments.
Grattan Institute, Melbourne
32. Australian Government. 2012. ‘Statement 4: Building resilience through national savings’.
Budget 2012-13. Treasury, Canberra
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