Australia

   

Economic Policies

#21
Key Findings
With a positive government budgetary balance masking some underlying weaknesses, Australia falls into the lower-middle ranks (rank 21) with respect to economic policy. Its score in this area has improved by 0.2 points relative to 2014.

GDP growth weakened in 2019, but the country avoided slipping into recession. The unemployment rate rose slightly, reaching 5.3% in September. Underemployment rates remain high, but long-term unemployment rates are low. While real disposable incomes have stagnated for years, tax revenues have increased, leading to forecasts of a 2019 budget surplus.

A housing boom that drove growth for nearly three decades has come an end. Conflict with China has dampened economic growth prospects. A tax-system change has significantly reduce income-tax progressivity. Net federal debt is very low by international standards, but fiscal sustainability remains a concern.

The moderate tax levels have contributed to low-quality public infrastructure. The tax system does little to produce ecological sustainability. Private-sector debt levels are very high, and banks are highly exposed to the now-declining real-estate sector.

Economy

#24

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 weakened in 2019. While the country avoided slipping into recession, GDP growth per capita was -0.2% over the year to 30 June 2019, while unemployment edged up from a low of 5.0% in November 2018 to 5.3% in September 2019. Moreover, real household disposable income per capita has remained stagnant for a number of years, and as of mid-2019 was approximately 3% 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 two years, leading to forecasts of a budget surplus in 2019 – 2020, although this is unlikely to be realized if there is further weakening of the economy.

Australia’s monetary policy is one of the country’s economic bright spots. The Reserve Bank of Australia (RBA) has steered a convincing course between the ultra-loose policies of the European Central Bank (ECB) and the more sustainable approach of the U.S. Federal Reserve. The RBA has sought to prevent a sharp appreciation of the Australian dollar while also avoiding a situation in which it was providing liquidity too cheaply. It has been quite successful in recent years.

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 in the major cities declined through mid-2019, falling approximately 10% in real terms from their June 2017 peak. Both the slowdown of the Chinese economy and the political conflict with China, which continued unabated in 2019, dampen the economy’s future prospects.

The main barrier to integrated economic policy continues to be the federal structure of government, as well as 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.

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, the overall unemployment rate has risen, but continues to be comparatively low at 5.3%. However, underemployment rates – reflecting part-time workers seeking more hours of work – have 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.

Australia has managed to maintain a comparatively low rate of long-term unemployment. The combination of a lack of welfare payments for newly arrived migrants and a high minimum wage has helped to facilitate the integration of migrants into Australian society. At the same time, the stagnation in real wage levels may be the result of the migration of low-skilled labor to Australia.

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 2019, the minimum wage was increased by 3% to AUD 19.40 per hour. Given the stagnation in real wage levels 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) introduced in March 2019, which entails higher costs for the employer and includes stricter conditions, including a requirement to pay a Skilling Australians Fund levy of at least AUD 1,200 and up to AUD 5,000.

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

Temporary skill shortage visa: https://immi.homeaffairs.gov.au/visas/getting-a-visa/visa-listing/temporary-skill-shortage-482

Low-skill migration may contribute to poor pay growth at bottom end of labour market – report, The Guardian, 29 July 2019. Available at https://www.theguardian.com/business/2019/jul/30/low-skill-migration-may-contribute-to-poor-pay-growth-at-bottom-end-of-labour-market-report

Taxes

#20

How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?

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
7
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 spending reductions and tax increases. Moreover, there is long-standing concern over the fiscal sustainability of state and territory governments, which have very limited independent capacities for raising revenue. The increasing need for health and education expenditure by the states and territories has outpaced revenue growth.

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.

During the review period, significant changes to the income-tax system were passed by the legislature, although the changes will be implemented over seven years. Beginning in 2024, over 90% of taxpayers will face a top marginal income-tax rate of 30%, which will apply on incomes in the range of AUD 45,000 to AUD 200,000 per annum. The current 32.5% rate, applying to incomes in the range AUD 37,000 – AUD 90,000, and the 37% tax rate, applying to incomes in the range of AUD 90,000 – AUD 180,000, will be eliminated, with the current 45% top rate (currently for incomes over AUD 180,000) to apply to incomes over AUD 200,000. This represents a significant reduction in the progressivity of the income-tax system. The Labor opposition has indicated that it does not support the plan, although it is not clear that they would repeal the legislation should they win office at the next election (likely to be held in 2022).

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.

Although the tax-to-GDP ratio in Australia has risen in recent years, it remains among the lowest such figure of any OECD economy, and has therefore helped preserve the Australian economy’s competitiveness. However, this low level of taxation arguably creates bottlenecks in infrastructure development that 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).

The tax system does very little to promote ecological sustainability. There are some tax offsets or credits intended to encourage rural property owners to improve the sustainability of their land use, but little else of note. There is no taxation of emissions.

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

#16

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 18% 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 economic slowdown may lead to a significant deterioration in the country’s fiscal position. At the same time, Australia’s population is continuing to grow, while showing less demographic aging than is the case in many other economies. Considering these two factors, budget policy appears to be somewhat too conservative.

Australia’s fiscal position improved in the review period, and indeed is forecast to be in surplus in the 2019 – 2020 period. Rather than explicit measures increasing revenue and reducing expenditure, the key drivers of this return to fiscal balance have been improvements in commodity prices and hence company profits, as well as bracket creep, in which the non-indexation of tax thresholds has resulted in a rise in the average tax rate on income.

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

Research, Innovation and Infrastructure

#18

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
6
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 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 has been little evidence of substantive policy change since then. The comparatively low quality of the infrastructure is the result of limited spending on its modernization. This reflects the preference of Australian society for moderate levels of taxation.

As of the end of the review period, there had been no notable developments in the area of research and innovation policy under the Morrison government. In December 2019, the Morrison government announced changes to the R&D tax-incentive system, but these had not yet passed into legislation as of February 2020.

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

#23

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 the country’s 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, thus applying to the country’s five largest banks beginning on 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 raises approximately AUD 1.6 billion per annum.

While Australian banks appear to be stable, they have substantial exposure to real-estate lending. Fully 60% of the Australian financial system’s loan book is focused on real estate. A sharp decline in house prices would cause severe problems for the banking system. Motivated by widespread reports of unconscionable conduct by banks and other financial institutions, the federal government convened a Royal Commission of Inquiry in 2018, tasking it with looking into misconduct in the finance industry. The inquiry reported in February 2019, although few policy changes appear to be resulting.

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, the country’s governments have not addressed this issue, arguing that it reflects the decisions of the private sector (including households). In 2017, household debt totaled 211% of net disposable income, one of the highest such ratios in the OECD.

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

https://financialservices.royalcommission.gov.au/Pages/reports.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
Back to Top