Australia

   

Economic Policies

#25
Key Findings
With a need for economic reinvention becoming ever clearer, Australia falls into the lower-middle ranks (rank 25) with respect to economic policy. Its score in this area has fallen by 0.3 points relative to 2014.

GDP growth rates are low, and per capita income is stagnant. The coalition government’s most recent budget reflected a more balanced mix of expenditure cuts and tax increases than previously. However, the end of the mining boom and an auto-manufacturing decline have left an economic void.

Unemployment rates remain comparatively low, but wage growth is flat. A high minimum wage may be a drag on employment, but has helped to stabilize domestic demand. Skills shortages brought an influx of foreign workers early in the decade, but visa-approval conditions have since been tightened.

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. Corporate-tax rates are falling. Private-sector debt levels are very high, and banks are highly exposed to the inflated real-estate sector.

Economy

#33

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
4
Australia’s economy remained relatively weak through the year-long period to 8 November 2017. GDP growth was well below the long-term trend, while real household disposable income per capita remained stagnant, currently 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 end of the boom has seen a decline in tax revenue as a share of GDP, resulting in a succession of substantial budget deficits since 2009. A lack of microeconomic and tax reforms over the last decade has also contributed to the recent slowdown in economic growth.

The end of the mining boom has resulted in a void: Australia needs to reinvent itself, but does not know how. Prime Minister Turnbull’s calls for increased technological capacity remains vague. The end of car manufacturing in Australia has resulted in a loss of well-paid industry jobs.

During the review period, the Liberal-National coalition government finally accepted that to secure the passage of budget measures through the senate, revenue measures are required in addition to expenditure measures to restore budget balance. The May 2017 budget therefore saw a more balanced mix of expenditure cuts and tax increases than had been attempted unsuccessfully in previous years.

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 also proved to be a barrier in achieving cooperation across the 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), 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.

Labor Markets

#17

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 moderately, but continues to be comparatively low. However, wage growth has been very subdued, with almost no increase in real average earnings since 2013. The significant rise of wages during the mining boom, including the minimum wage, has been serving as a break on additional wage increases since 2012.

In recent years, so-called skills shortages have been a topic of recurrent concern in the Australian labor market. One response to the perceived shortages of skilled labor has been to allow more skilled immigrants to enter the country on temporary 457 visas. The number of workers on 457 visas increased considerably until 2013, reaching 126,348 in 2013. However, following concerns that employers were frequently 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 form India.

Minimum wages, which are set by an independent statutory authority, the Fair Work Commission, have arguably emerged as an increasing constraint on employment over the review period. The national minimum wage is relatively high by international standards, at around 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 much higher than the national minimum wage. Taking effect in July 2017, the minimum wage was raised to AUD 18.29 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. At the same time, the high minimum wage has contributed to stabilizing domestic demand.

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?; 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.

Taxes

#27

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
At a broad level, the tax system achieves a reasonably high degree of horizontal equity, with income generally taxed at the same rate irrespective of the source of the income. The main exception arises in respect of 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 arises in respect to retirement savings (known as superannuation), which are minimally taxed. That aside, the income-tax system is moderately progressive. Only minor changes to income tax occurred in the review period. A temporary (two-year) “deficit repair levy” of 2% of income in excess of AUD180,000 expired on 30 June 2017, while a 0.5% increase in the Medicare Levy (paid on all income by those earning moderate or higher incomes) was introduced to support the National Disability Insurance Scheme, effective 1 July 2019. The government has also moved to increase taxation of superannuation for those on high incomes or with high superannuation balances, and has also begun implementing reductions in the company tax rate from 30% to 25%, with the new lower rate applying to companies with annual turnover of less than AUD 25 million from 1 July 2017, and applying to companies with annual turnover of less than AUD 50 million from 1 July 2018.

The tax-to-GDP ratio in Australia is among the lowest of any OECD economy. Arguably, the low level of taxation creates bottlenecks in infrastructure development, which have not been sufficiently addressed. Particularly Sydney and Melbourne are exposed to infrastructure bottlenecks.

With regard to sufficient inflow of tax revenue, as outlined in detail in “sustainable budgets,” concerns have again heightened 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 about the fiscal sustainability of state and territory governments, which have very limited capacities for raising revenue. Growth in health and education expenditure demands on the states and territories in particular have 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

Budgets

#32

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
6
While net federal government debt standing at approximately 20% of GDP at the time of the review period, 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. Finally, Chinese demand for Australia’s exports and real estate in Australia keep the outlook for the Australian budget stable. The Australian central bank has recently warned that it could be forced to put a lid on rising real estate prices, which would surely result in a recession.

Australia’s fiscal position, while still relatively weak, showed some sign of turning around in the review period. While the budget remains in deficit, modest expenditure and revenue measures were implemented in the 2017 budget which have moderated the growth of government debt. The key driver of a return to fiscal balance is bracket creep, whereby non-indexation of tax thresholds results in a rise in the average tax rate on income, rather than explicit measures to increase revenue and reduce expenditure.

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.

Research and Innovation

#27

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
Since the Abbott government was elected in September 2013, government support for research and innovation has been reduced considerably. Australia continues to provide significant public financial support for research and development, but the results continue to be quite disappointing. 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 there was no science minister under the Abbott government, for the first time since 1931. However, with the replacement of Abbott with Malcolm Turnbull as prime minister in September 2015, a new cabinet was formed that included a science minister, but no new policy announcements have been made. The Australian Academy of Science has suggested a ten-year plan for enhanced research in agricultural science. While Australia will be able to benefit from growing consumer demand in Asian societies, research in agriculture will be important for maintaining Australia’s good competitive position in agriculture.

Citations:
Australian Government, ‘Powering Ideas: An Innovation Agenda for the 21st Century,’ 12 May 2009: http://www.innovation.gov.au/innovation/policy/pages/PoweringIdeas.asp x

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

Australian Academy of Science, A Decadal Plan for Agricultural Sciences, Juni 2017, available at https://www.science.org.au/support/analysis/decadal-plans-science/decadal-plan-agricultural-sciences-2017-2026

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

Global Financial System

#19

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 Markets
7
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.

After the financial crisis of 1989 to 1990, Australia successfully improved its national financial regulations. Prudential supervision of Australian banks and other financial institutions is now 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 have been implemented by the Turnbull government. Measures have included an increase in banks’ capital-adequacy requirements. According to government estimates, the four big banks needed an additional AUD 40 billion in fresh capital. Additionally, the 2017 budget introduced a “major bank levy” on banks with over AUD100 billion in total liabilities, applying to the five largest banks. 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 around AUD1.5 to AUD1.6 billion per annum.

While Australian banks appear to be stable, their capital base is weak, the reason being their enormous exposure to real estate lending. For a real estate loan of AUD 500,000 dollars, a bank only has to hold AUD 10,000 of capital. Given the high price levels for real estate in Australia, that cushion appears inadequate.

Australia has also accumulated a high level of net foreign debt, currently totaling AUD 1.06 billion. 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). In 2017, household debt was 122% of GDP, the second-highest in the OECD after the Netherlands.

Australia’s gross debt – at AUD 1.90 billion – is almost twice the net debt level. While the Australian government has favored the use of net rather than gross figures, a realistic perspective needs to consider the latter. The simple reason is that those that hold claims on the rest of the world may not be identical to those that have borrowed from the rest of the world. In other words: Those that need to repay the debt might be, or most probably are, different from those who receive dividends and interest from investments abroad. In the event of a crisis, gross debt is the figure that matters.

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/

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, 16.5.2015, S. 63.

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