Australia

   

Economic Policies

#24
Key Findings
With household incomes trailing the overall growth in the economy, Australia falls into the lower-middle ranks (rank 24) with respect to economic policy. Its score in this area has fallen by 0.1 points relative to 2014.

While GDP growth has returned to its long-term trend, real per capita household disposable income has stagnated below its 2012 level. A decline in terms of trade has hit wages, and hence household incomes, hard. Unemployment rates remain low, but underemployment is a problem. Virtually no increase in real average earnings has been seen since 2013.

Tax revenue has picked due to growth in company tax receipts. However, the housing boom, a decades-long driver of economic growth, has come to an end, with housing prices now declining. Company tax rates are dropping for SMEs, and a significant reduction in top marginal income tax rate is planned.


Public debt levels remain comparatively low, but fiscal sustainability remains a concern. The tax-to-GDP is very low in cross-OECD comparison, arguably creating infrastructure-development bottlenecks. Private-sector debt levels are very high, and banks are highly exposed to the now-declining real-estate sector.

Economy

#22

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
6
Australia’s economy experienced moderate improvement in the year-long period to 8 November 2018. GDP growth returned to its long-term trend. However, real household disposable income per capita was stagnant, and as of mid-2018 remains 1% below its 2012 level. The economy has struggled to adapt to the end of the mining boom, when record-high commodity prices delivered substantial growth in national income. The decline in terms of trade has hit wages, and hence household incomes, hard. The end of the boom also saw a decline in tax revenue as a share of GDP, resulting in a succession of substantial budget deficits from 2009. However, tax revenue has picked up in the last year, primarily due to growth in company tax receipts, in turn reflecting improvements in commodity prices. A lack of microeconomic and tax reforms over the last decade nonetheless continues to act as a drag on Australia’s economic growth prospects. The housing boom, which was a significant driver of economic growth for almost three decades, has come to an end. House prices may well decline further, and even a dramatic reduction of property prices cannot be completely discounted.

The main barrier to integrated economic policy continues to be the federal structure of government, and the duplication of many services and regulatory functions between the federal government and the governments of the six states and two territories. The federal system has proven to be a barrier to achieving cooperation across jurisdictions. As a result, reform of many social services, most notably health and education, has reached an impasse. The core of the problem is the limited revenue-raising powers held by the states, which are dependent on block grants from the federal government. Prior to the 2016 meeting of the Council of Australian Governments (COAG), then Prime Minister Turnbull floated a proposal to reintroduce state income taxes as a way of eliminating the “vertical fiscal imbalance.” However, all but one of the state and territory leaders quickly rejected the proposal.

Citations:
Matt Wade: Housing slump ‘the biggest threat to the Australian economy,’ Sydney Morning Herald, 5 December 2018, available at https://www.smh.com.au/business/the-economy/housing-slump-the-biggest-threat-to-the-australian-economy-20181204-p50k79.html

Labor Markets

#19

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
7
Since the peak of the mining boom in 2012, unemployment has risen but continues to be comparatively low. However, underemployment – part-time workers seeking more hours of work – has remained very high. Wage growth has been very subdued, with almost no increase in real average earnings since 2013. Questions have been raised as to whether the industrial relations system has excessively reduced the bargaining power of employees, for example through restraints on the right to strike, contributing to tepid wage growth.

Minimum wages, which are set by an independent statutory authority, the Fair Work Commission, have potentially acted as an increasing constraint on employment over the review period. The national minimum wage is relatively high by international standards, at approximately 55% of the median full-time wage; more importantly, there are also a large number of industry- and occupation-specific minimum wages that can be substantially higher than the national minimum wage. Taking effect in July 2018, the minimum wage was increased by 3.2% to AUD 18.93 per hour. In the context of stagnation in real wages in the broader economy, the “bite” of minimum wages (i.e., the extent to which they negatively impact employment) has been increasing. Nevertheless, high minimum wages have arguably contributed to stabilizing domestic demand.

So-called “skills shortages” have been a recurring topic of concern in the Australian labor market in recent years. One response has been to allow more skilled immigrants to enter the country on temporary 457 visas. The number of workers on 457 visas increased considerably up to 2013, reaching 126,348 in that year. However, following concerns that employers were misusing the program to obtain cheap labor, the federal government tightened the conditions under which 457 visas could be obtained, resulting in a decline to 95,360 by March 2017. Previously, one-quarter of 457 visas were given to software developers from India.
The Australian government in effect tightened the conditions for temporary workers from abroad. The “Temporary Skills Shortage Visa” is a new visa category (482) and results in both higher costs for the employer and in stricter conditions, which include a minimum wage for the foreign worker of AUD 53.900 plus retirement provisions. The visa application alone will cost larger corporations AUD 7.200 in government fees alone.

Citations:
Department of Immigration and Border Protection ‘Changes to the Subclass 457 program’: http://www.immi.gov.au/skilled/changes-457-program.htm
Updated data on 457 visas granted is available on the Australian Border Force web site:
http://www.border.gov.au/about/reports-publications/research-statistics/statistics/work-in-australia.

Minimum wage: How does Australia compare to other countries? ABC. 31 May 2016. Available at http://www.abc.net.au/news/2016-05-31/minimum-wage-how-does-australia-compare/7461794

Australia to axe foreign workers visa scheme, Financial Times, 19 April 2017, p. 4.

Mike Toten: From 457 visas to 482s: 25 more hurdles to jump? 8 April 2018. Available at https://hradvance.com.au/news-articles/%E2%80%8Bfrom-457-visas-to-482s-25-more-hurdles-to-jump

Taxes

#25

To what extent does taxation policy realize goals of equity, competitiveness and the generation of sufficient public revenues?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
6
The tax system achieves a reasonably high degree of horizontal equity, with income generally taxed at the same rate irrespective of its source. The main exception is capital-gains taxation, where the family home is exempt from taxation and a 50% discount is applied to capital gains on other assets held at least one year. A further significant exemption is retirement savings (known as superannuation), which are minimally taxed. These exceptions aside, the income-tax system is moderately progressive. Australia’s taxation system redistributes less than other OECD countries, and relatively high remuneration after taxes and social security is a major pull-factor in its migration policy.

The review period saw only minor changes to income tax. However, the federal government budget published in May 2018 laid out a seven-year plan for radical changes to the income tax schedule. Under the plan, from 2024 over 90% of taxpayers would face a top marginal income tax rate of 32.5%, which would apply on incomes up to AUD 200,000 per annum. The current 37% tax rate, applying to incomes AUD 40,000 - 180,000 would be eliminated, with the current maximum 45% rate retained for incomes over AUD 200,000. If implemented, this would represent a significant reduction in the progressivity of the income tax system. The Labor opposition has indicated that it does not support the plan.

The government has been frustrated by the Senate in its attempts to reduce the company tax rate from 30% to 25%, and has settled on a phased reduction for companies with annual turnover of less than AUD 50 million. The 25% tax rate will be fully implemented for companies with an annual turnover of less than AUD 50 million from 2021.

The tax-to-GDP ratio in Australia is among the lowest of any OECD economy. Arguably, this low level of taxation creates bottlenecks in infrastructure development, which have not been sufficiently addressed. Sydney and Melbourne are particularly exposed to infrastructure bottlenecks, although there has been a substantial surge in infrastructure investment in recent years (albeit, mostly funded by state governments).

With regard to sufficient inflow of tax revenue, as outlined in detail under the “budgets” indicator, despite some recovery of tax revenue in the review period, concerns persist that the federal government faces a structural deficit that will require difficult fiscal decisions in the near future, most likely involving a combination of reductions in spending and tax increases. Moreover, there is a long-standing concern over the fiscal sustainability of state and territory governments, which have very limited capacities for raising revenue. The increasing need for health and education expenditure by the states and territories has outpaced revenue growth.

Citations:
Australia’s Future Tax System, Report to the Treasurer. Canberra: Commonwealth Government, 2009. Available from http://taxreview.treasury.gov.au/content/Content.aspx?doc=html/pubs_reports.htm.

Australian Government ‘Re:think Tax Discussion Paper,’ March 2015: http://bettertax.gov.au/publications/discussion-paper/.

http://www.treasury.gov.au/Policy-Topics/Taxation/Pocket-Guide-to-the-Australian-Tax-System/Pocket-Guide-to-the-Australian-Tax-System/Part-1

Shamsher Kainth: Migrants in Australia among the happiest in the world: report, SBS, 18 March 2018, available at https://www.sbs.com.au/yourlanguage/punjabi/en/article/2018/03/27/migrants-australia-among-happiest-world-report

Budgets

#26

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
7
While net federal government debt currently stands at approximately 20% of GDP, the consensus is that Australia has a structural deficit. This means that, averaged over the business cycle, existing revenue streams will not adequately meet ongoing expenditure needs given current tax rates and expenditure levels. The reasoning is that commodity prices will not return to pre-2008 levels, and expenditure demands are projected to increase over coming years, partially due to an aging population. The combination of weak commodity prices and a real-estate induced recession may lead to a significant deterioration of the fiscal position.

Australia’s fiscal position, while still relatively weak, showed signs of improvement in the review period, following mild improvements in 2017. While the budget remains in deficit, modest expenditure and revenue measures were implemented in the 2017 and 2018 budgets which have moderated the growth of government debt. Rather than explicit measures to increase revenue and reduce expenditure, the key driver of a return to fiscal balance is bracket creep, whereby non-indexation of tax thresholds result in a rise in the average tax rate on income.

Citations:
Australian Government Treasury historical budget and net worth data: http://www.budget.gov.au/2017-18/content/bp1/download/bp1_bs11.pdf

http://www.abc.net.au/news/story-streams/federal-budget-2017/2017-05-09/federal-budget-2017-winners-losers/8505738

Reserve Banks warns regulators could take drastic action to cool Sydney, Melbourne housing market. The Sydney Morning Herald. 18 April 2017. Available at http://www.smh.com.au/business/the-economy/reserve-bank-warns-regulators-could-take-drastic-action-to-cool-sydney-melbourne-housing-market-20170418-gvmszs.html

http://infrastructureaustralia.gov.au/policy-publications/publications/files/Australian-Infrastructure-Audit-Executive-Summary.pdf.

John Kehoe: Australia most exposed to housing debt downturn. Australian Financial Review. 30 October 2018. Available at https://www.afr.com/news/economy/australia-most-exposed-to-housing-debt-downturn-20181030-h179ko

Research, Innovation and Infrastructure

#26

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
4
After the Abbott government was elected in September 2013, government support for research and innovation was reduced considerably and has not materially recovered. The Abbott government cut funding to the Australian Research Council scheme, which funds non-medical university research, and abolished the Australian Renewable Energy agency, which acted to support renewable energy projects in their start-up and early stages. Also telling was the fact that under the Abbott government there was no science minister for the first time since 1931. However, with the replacement of Abbott by Malcolm Turnbull as prime minister in September 2015, a new cabinet was formed that included a science minister, and the Department of Industry and Science was expanded to become the Department of Industry, Innovation and Science. The National Innovation and Science Agenda (NISA) was announced in December 2015, emphasizing science, research and innovation as long-term drivers of economic prosperity, jobs and growth. As part of this agenda, AUD 1.1 billion was committed over four years to 24 measures aimed at encouraging entrepreneurship, fostering collaboration between industry and researchers, developing and attracting talent, and by government “leading by example.” In November 2017, a report was released laying out a strategic plan to 2030 for optimizing investment in Australian innovation. The Australian government, in its May 2018 response to the report, expressed support in principle for most of the recommendations, but there is little evidence of substantive policy change since then.

Citations:
Australian Government Department of Industry, Innovation, Science, Research and Tertiary Education, ‘Australian Innovation system Report 2012’: http://www.innovation.gov.au/Innovation/Policy/AustralianInnovationSystemReport/AISR2012/index.html

Innovation and Science Australia 2017, Australia 2030: prosperity through innovation, Australian Government, Canberra: https://www.industry.gov.au/sites/g/files/net3906/f/May%202018/document/pdf/australia-2030-prosperity-through-innovation-full-report.pdf

OECD, Economic Survey Australia 2014, Paris: OECD, 16 December 2014.

http://www.smh.com.au/business/federal-budget/federal-budget-scientists-push-for-more-research-funding-20160411-go3uaa.html

Emma Alberici: Innovation is still the key to jobs and growth. ABC. 17 May 2018. Available at https://www.abc.net.au/news/2018-05-18/innovation-the-key-to-jobs-and-growth/9772938

Global Financial System

#22

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial System
6
As a globally oriented country with a high degree of international economic integration, including financial market integration, Australia has a strong interest in promoting a stable, efficient and transparent international financial system. Australia displays a strong commitment to preventing criminal financial activities, including tax evasion. To that end, the government has information sharing arrangements with a number of countries. However, Australia is a relatively small player in international finance and has a limited ability to shape the regulatory process within multilateral institutions.

Prudential supervision of Australian banks and other financial institutions is generally of high quality. Indeed, reflecting its strong regulations, no Australian bank experienced substantial financial difficulties throughout the financial crises that began in 2008. In 2014, the Abbott government commissioned a broad-ranging inquiry into the Australian financial system, focusing on how the financial system can most effectively help the Australian economy be productive, grow and meet the financial needs of Australians. The report made 44 recommendations, a number of which were implemented by the subsequent Turnbull government, including an increase in banks’ capital adequacy requirements. According to government estimates, the four largest banks needed an additional AUD 40 billion in fresh capital. Additionally, the 2017 budget introduced a “major bank levy” on banks with over AUD 100 billion in total liabilities, which applied to the five largest banks from 1 July 2017. The levy rate is set at 0.015% of the balance of a bank’s total liabilities (but with a number of exclusions), and is expected to raise approximately AUD 1.5 - 1.6 billion per annum.

While Australian banks appear to be stable, they have substantial exposure to real estate lending. 60% of the Australian financial system’s loan book is in real estate lending. A severe decline of house prices would cause severe problems for the banking system. A further cause for concern about future prospects for the banking system is that, motivated by widespread reports of unconscionable conduct by banks and other financial institutions, in 2018 the federal government initiated a Royal Commission of Inquiry into misconduct in the finance industry. The inquiry was ongoing as of the end of the review period and is due to report in February 2019.

Australia has accumulated a high level of foreign debt, with net debt of over AUD 1 trillion and gross debt of AUD 1.9 trillion. While this high level of debt is a risk to Australia’s financial stability, Australian governments have not addressed this issue, arguing that it reflects the decisions of the private sector (including households). An increase in real interest rates, initiated by the U.S. Federal Reserve, will place a significant burden on Australian debtors. In 2017, household debt was 211% of net disposable income, one of the highest ratios in the OECD.

Citations:
Buttiglione, Luigi; Lane, Philip R.; Reichlin, Lucrezia and Vincent Reinhart (2014): Deleveraging? What Deleveraging? Center for Economic Policy Research, Geneva Reports on the World Economy, Nr. 16 (September 2014), p. 15.

Financial System Inquiry Final Report, December 2014: http://fsi.gov.au/publications/final-report/

https://financialservices.royalcommission.gov.au/Pages/default.aspx

Is it time to end ultra-low rate regime? The Australian. 11./12. March 2017, p. 25.
https://tradingeconomics.com/australia/external-debt

The Economist, Like a shag on a rock. 16 May 2015. S. 63.

https://data.oecd.org/hha/household-debt.htm#indicator-chart

Emily Cadman: Moody’s move shines light on Australia’s home loan risks, Sydney Morning Herald, 20 June 2018, available at https://www.smh.com.au/business/the-economy/moodys-move-shines-light-on-australias-home-loan-risks-20170620-gwufh4.html

Michael Janda: Australia’s debt binge ‘coming to an end,’ says Bank for International Settlements. 25 June 2018. Available at https://www.abc.net.au/news/2018-06-25/australia-named-as-household-debt-problem-country/9905390

OECD: Households accounts, available at https://data.oecd.org/hha/household-debt.htm
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