Major Tax Reform Needed to Avoid an Unfolding Fiscal Crisis

The Business Council of Australia calls for next week’s national tax forum to agree on the need for a 10-year overhaul of Australia’s tax system.

The council warns Australian governments face a combined annual budget shortfall of five per cent of GDP by 2050 unless there are comprehensive changes to the tax system and a more efficient and accountable approach to government spending.

In today’s terms that shortfall would be $70 billion, which is the size of the federal health and disability budget or around 20 per cent of the current federal tax take. Left unaddressed this will threaten the ability of governments to pay for essential services and the social safety net on which the Australian social compact is predicated.

This is a key finding in research underpinning the Business Council of Australia’s submission to next week’s national tax forum, released today. This research outlines projected trends in future combined spending by Commonwealth and state and territory governments, based on methodology used in the Intergenerational Report.

Council President Graham Bradley says Australia’s emerging budget challenge could turn into a fiscal crisis over the next 40 years or sooner if action is not taken.

The research underlines why governments need to commit to a 10-year overhaul of the tax system and review their approach to government spending so we can afford the social safety net, deliver quality services and improve the efficiency of government expenditure at all levels, Mr Bradley said.

“Our research shows Australia faces an unfolding financial crisis over the next 40 years,” Mr Bradley said. “Unless we start a decade of substantial change to the tax system and government spending we will not be able to pay for the future.”

“We need a tax system that ensures we can fund essential services and the social safety net we expect, and it also must encourage higher investment and savings to generate economic growth,” Mr Bradley said.

Mr Bradley said there were major problems with the way finances are organised between the states and the Commonwealth, with unsustainable state finances increasingly becoming a major  drag on the Commonwealth.

“We must fix the situation which sees the  states currently  responsible for around $200 billion in spending, including health and education services, but barely half of this is funded through their own sources of tax revenue and the GST. 

“The tax system is inefficient, uncompetitive and too complicated for families, individuals and businesses, and income and company taxes are too high to encourage the investment and savings we need to make our economy stronger.

“In 2010 Australia’s effective corporate tax rate on new investments was estimated as 26 per cent compared with an average among our regional competitors of 18 per cent, and our personal income tax rate is also uncompetitive within our region.

“This is a major issue for Australia when it comes to attracting investment, and encouraging people to work and save for their future and for a stronger economy.

“We do not want the current financial problems in Europe and North America to be Australia’s future.

“The lesson we can learn from overseas economies is that it is better to act when the economy is in good shape rather than be forced to make uncomfortable but unavoidable changes in the midst of a crisis or an economic downturn,” Mr Bradley said.

The submission calls on the Australian Government and parliament to embark on a 10-year reform of the tax system and government expenditure with four key actions:

  • improve the efficiency and sustainability of future government expenditure
  • reduce the reliance on volatile direct taxes in favour of more stable indirect taxes such as consumption tax and land tax, and abolish inefficient state taxes while identifying options to replace that revenue
  • redesign the spending accountabilities and revenue raising capacities of the Commonwealth and states so the states have a more predictable share of revenue including potentially from a share of income tax
  • simplify the tax system using the Henry tax review as the starting point.

Business Council of Australia Chief Executive, Jennifer Westacott, who will represent the council at next week’s tax forum, said the Australian Parliament should map out a process beyond the forum for a long-term tax reform agenda.

Ms Westacott said the process should consider the potential role of independent bodies which may have a greater capacity to deal with options and issues that might otherwise be off-limits for Australia’s political parties.

“Australia can no longer afford to muddle through with a piecemeal and short-term approach to tax reform. The tax forum provides an opportunity to agree that the longer we put off major change the worse we will be,” Ms Westacott said.

“Unless we recognise the need to change the tax system to better suit our future needs we face declining productivity, a weaker economy and will struggle to pay for services such as health, social security, education and infrastructure required by future generations.”

Preparing for a Better Future: Progressing Comprehensive Tax Reform in Australia is the Business Council of Australia’s submission to the Australian Government’s 2011 tax forum. An overview and executive summary, and the full submission (which includes a report by Deloitte Access Economics titled ‘An Intergenerational Report for the States’), can be downloaded below.

Preparing for a Better Future: Progressing Comprehensive Tax Reform in Australia – Overview and Executive Summary (PDF, 2MB)

Preparing for a Better Future: Progressing Comprehensive Tax Reform in Australia (PDF, 3MB)