Threshold Adjustment Only a Beginning

05 October 2006

By Hugh Morgan 
Business Council of Australia 

It is a matter of fact in the modern world that governments compete aggressively to provide healthy competitive environments for economic growth and prosperity.

This was also the central message in the Business Council of Australia's federal budget submission and its Taxation Action Plan released earlier this year and provides an important benchmark by which business should assess this week's federal budget.

In the submission, the BCA highlighted three major concerns.

First, Australia's income tax scales inhibit incentives to work and save, and are not internationally competitive.

Second, the headline corporate tax rate is well above that enjoyed by our closest competitors, and the manner in which corporate income is assessed produces a corporate tax burden that is significantly out of line with international comparisons.

Third, after a decade of remarkably strong growth, the Australian economy is showing increasing signs of fatigue and imbalance.

Given this, how does this week's budget stack up?

The government has made a major adjustment to income tax thresholds and has also changed marginal rates at the lower end of the scale, putting $21.7 billion back into people's pockets over four years.

It has also tried to deal with some of the more distortionary effects of the tax-welfare system and its damaging impact on workforce participation.

Both are positive.

The tax threshold adjustment is wholly appropriate to avoid short-term fiscal contraction, but it is not the long-term taxation reform that is required to ensure Australia's competitiveness.

It's disappointing that the rate scales have not changed. As previous changes to tax thresholds have shown, reform gains are quickly eroded through bracket creep. Long-term reform of the income tax system requires substantial changes to both rates and thresholds.

The corporate tax system is also in need of serious reform. Once again, the massive contribution of corporate tax to government revenues has greatly benefited the community and funded many of the initiatives announced in this year's budget.

Over the past five years, the corporate tax take has compounded at a rate of more than twice nominal GDP growth.

Notwithstanding the reduction in the headline rate from 36 per cent to 30 per cent, corporate tax is now at a record 5 per cent of GDP. This burden is substantially larger than that experienced by our major competitors.

Though a number of budget initiatives were aimed at reducing company tax burdens, the BCA reinforces its call for a review of corporate taxes to make sure the tax system is as competitive as possible and is in line with the continued decrease in corporate tax rates in major overseas markets.

Finally, and perhaps most significantly, the importance of a long-term fundamental economic reform agenda for Australia's future success was outlined in the budget's "Prosperity and Sustainability Statement".

It noted that "the strength of the economic performance, and the Australian government's sound fiscal position, present a unique opportunity to implement a cohesive policy agenda that will underpin strong economic growth now and over the decades to come."

We emphatically agree. The need for such a reform agenda was a central theme of the BCA's budget submission and related policy releases.

The BCA has been working to advance an integrated policy platform that pinpoints the four key areas of our economy workplace relations, tax and business regulation reform and infrastructure that need significant reform to lock in prosperity.

In just over a month the coalition will have a majority Senate, and become the first federal government in 20 years to have full control over its policy destiny.

Overall, the BCA sees this budget as a first instalment in the process of delivering a substantial and comprehensive economic reform agenda.

The budget did not take advantage of the policy opportunity and the strength of our economy to detail a wider reform agenda.

This must be pursued immediately. And though the budget adopted a "no losers" approach in terms of the measures announced, adopting the same approach to a broader reform agenda will limit the scope and ultimately the benefits of reforms delivered.

Experience tells us that difficult policy change will involve costs the challenge is to manage those costs and transitions fairly and effectively so that they result in the broadest benefits.




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