What We’re Reading

John Birmingham – The Demise of the Killer Tomatoes

Paul Krugman – An interest rate hike too far

Richard Denniss – Is the Mining Tax too low?

At a glance

The Federal Treasurer, Wayne Swan, took  his axe to tax breaks, cut the baby bonus and forced the public service to accept new cuts, as parts of his mid year economic review.

His bottom lines were  a revised forecast of  a budget deficit of $37.1 billion this financial year and a small surplus by $1.5 billion in 2012-13.

Both figures reflect the downturn in the world economy, that came with Europe’s debt worries.

Mr Swan said $11.5 billion in new savings would be delivered by cutting back on the baby bonus, tax exemptions and other reforms.

“At the end of the day, strong public finances and strong economic fundamentals are the best protection that we can provide for working people in our country,” he said.

Tax changes:What you need to know

Several changes have been made to Australia’s tax laws, as part of the  Mid-Year Economic and Fiscal Outlook review.

Most build on ideas discussed at last month’s Tax Forum.

They include:-

Fringe benefits tax (FBT) reform – Living-away-from-home allowance and benefits

The Government says it  will introduce reforms to stop individuals from being able to exploit the tax exemption for living-away-from-home allowance and benefits.

It said this tax exemption is being increasingly misused by a narrow group of people, particularly highly-paid executives and foreign workers, at the expense of Australian taxpayers.

“Rorting of this tax exemption was one of the issues raised at the Tax Forum, and has seen the total amount of tax-free living-away-from-home allowance reported by employers to the Australian Taxation Office increase from $162 million in 2004-05 to $740 million in 2010-11,” the government said.

Under reforms just announced:-

*access to the tax exemption for temporary residents will be limited to those who maintain a residence for their own use in Australia, which they are living away from for work purposes, such as ‘fly-in fly-out’ workers and

*individuals will be required to substantiate their actual expenditure on accommodation and food beyond a statutory amount.

The government said no permanent resident legitimately using this tax exemption for accommodation and food expenses would lose any entitlements.

The government also said these reforms would not affect other tax concessions, such as those that apply to travel and meal allowances or remote area fringe benefits.

It said the reforms would apply from 1 July 2012.

The government said this start date would enable the Government to undertake an extensive consultation process on these reforms, so appropriate transitional arrangements can be put in place, including in regional Australia.

“These changes will ensure that a level playing field exists between temporary residents and permanent residents, and that Australian taxpayers are not funding the unfair exploitation of concessions,” it said.

“This reform progresses recommendation 9(c) of the Australia’s Future Tax System Review, and will provide savings of $683.3 million over the forward estimates,” the government’s announcement said.

Personal income tax reform – Dependent Spouse Tax Offset

The Government also aid it would further reduce outdated workforce participation disincentives for spouses without dependent children to take up paid employment by restricting the Dependent Spouse Tax Offset to those with spouses born before 1 July 1952.

It said this reform would not affect people whose spouse is an invalid or a carer, or who receive the zone, overseas forces or overseas civilian tax offsets.

A taxpayer’s entitlement to the Dependent Spouse Tax Offset is reduced by $1 for every $4 of income which their dependent spouse earns above $282 per year.

This means that the effective tax rate on the first $10,000 earned by a dependent spouse without children is around 25 per cent.

This measure builds on the reform announced in the 2011-12 Budget, which progressed recommendation 6(a) of the Australia’s Future Tax System Review, and will provide savings of $370.0 million over the forward estimates.

Responsible economic management

As part of its commitment to responsible economic management and returning the budget to surplus in 2012-13, the Government also said it would defer four previously announced tax reforms by one year.

*The start date of the standard deduction for work related expenses will be deferred until 1 July 2013.

*The start date of the 50 per cent tax discount for interest income will be deferred until 1 July 2013, allowing more time for consultation with stakeholders on issues previously raised by industry.

*The start date of the phase down in interest withholding tax for financial institutions will be deferred until 2014-15.

*The start date of the new tax system for managed investment trusts will be deferred until 1 July 2013, allowing more time for consultation with stakeholders about how to best implement the elements of the package.

Together the deferral of these four measures will provide savings of $2.1 billion over the forward estimates.

However the Government emphasised its commitment to fiscal discipline in the lead up to the Tax Forum, and aid it remains committed to these important tax reforms.

Swan spells it out

The Federal Treasurer, Wayne Swan, says Australia can look forward to solid economic growth.

He was delivering his Mid-Year Economic and Fiscal Outlook, or MYEFO.

Mr Swan  said the (MYEFO) also revealed a  $20 billion black hole in government revenues, due to the global economic crisis.

“Global economic and financial conditions have deteriorated markedly in recent months,” Mr Swan said.

“And the risks to global stability from the European sovereign debt crisis have intensified.

“Global growth prospects have been downgraded markedly in 2012, with the euro area expected to return to recession.

“This has led to a weaker near-term economic and fiscal outlook for Australia since the Budget and substantial reductions to government revenues.

“Real GDP is now expected to grow by 3¼ per cent in 2011-12 and 2012-13, downgrades of ¾ of a percentage point in 2011-12 and ½ of a percentage point in 2012-13,” he added.

Mr Swan said global developments had hit Australia’s share market,  trade outside of the mining sector and  confidence.

Consumers  had become more cautious and businesses more reluctant to expand their workforce in the current uncertain global environment.

“The recent instability in the global economy has had obvious consequences for revenue, with forecast tax receipts written down by more than $20 billion over the forward estimates,” he said

“ Lower tax receipts and higher payments – including advance payments to Queensland to support natural disaster recovery and significant assistance provided to households and businesses as part of the Clean Energy Future package – have led to a larger forecast deficit of $37.1 billion for 2011-12, returning to a small surplus of $1.5 billion in 2012-13,” Mr Swan concluded.

“The substantial downgrades to budget revenue flowing from heightened global turbulence have meant that the Government has had to find further savings in the budget.

“The European sovereign debt crisis has underscored the importance of maintaining fiscal discipline, which is important at a time when international financial markets are punishing those without discipline.

“The Government has responded to the more challenging fiscal outlook in a measured and balanced way, delivering $11.5 billion in new savings. The combined effect of all policy decisions has improved the budget bottom-line by $6.8 billion over the forward estimates.

“These savings steadily build over the forward estimates, and have been achieved through a combination of expenditure cuts including efficiencies sought within government, deferring some initiatives and implementing measures to improve the integrity and fairness of the taxation system.

“This mix of savings is appropriate given near-term uncertainty but more solid medium-term growth prospects, and will help strengthen our fiscal position over the medium term.

“Australia will return the budget to surplus ahead of all major advanced economies, and government net debt peaks dramatically lower than in these countries at 8.9 per cent of GDP in 2011-12, before falling to 7.7 per cent of GDP in 2014-15.

“ This is less than a tenth of the average net debt position of the major advanced economies expected in 2016 of 92.9 per cent of GDP.

“The decisions taken in this MYEFO have not been easy, but are crucial to sustaining confidence in Australia’s public finances.

“ As always, the Government has sought to protect low- and middle?income Australians, and the most vulnerable in our community, by striking the right balance in its budget decisions.

“Strong and stable economic management, and our record of fiscal discipline, remains very important for Australian families across the country because it helps underpin confidence in our economy and supports Australian jobs at a time of heightened global uncertainty,” Mr Swan said.

Swan confirms surplus

The Federal Treasurer, Wayne Swan, confirmed today that he expects to produce a budget surplus  in 2012-13.

Delivering a mini budget, Mr Swan said, the Budget will get back to surplus in 2012-13 as planned.

He said this would get more people into jobs and spread the opportunities from Mining Boom Mark II to more Australians.

Mr Swan said the key elements would  include:

• Taking the tough decisions necessary to ensure the budget returns to surplus in 2012-13, despite the impact of recent natural disasters.
• Continuing to invest in the economy’s productive capacity through better and more targeted skills and training, and new measures to boost participation and improve private sector opportunities to invest in infrastructure.
• Putting the opportunities that flow from a stronger economy within the reach of more Australians, by delivering on key reforms to mental health, extra support for families with teenagers and low income earners and investing in critical regional health and education infrastructure.

We’re still “solid” OECD

The OECD  says Australia’s economic outlook still looks “solid.”

In a statement just released, the Treasurer, Wayne Swan, says the OECD “confirms that the fundamentals and outlook for the Australian economy remain solid.”

Mr Swan says this is: “despite a major deterioration in Europe and a further slowing in the global economy in recent months.”

“The OECD states that Europe’s escalating crisis has resulted in a weaker growth outlook for OECD economies in the near term, and notes the euro area appears to be in a mild recession,” he adds.

“Against this backdrop, the growth forecast for OECD economies has been dramatically cut since May, revised down to 1.8 per cent in 2011 (from 2.3 per cent) and 1.6 per cent in 2012 (from 2.8 per cent).”

But the OECD did issue a warning.

It said there is a  possibility of a sovereign default in the euro area causing contagion to spread to other markets.

“According to the OECD, “without preventive action, events could strengthen such pressures and plunge the euro area into a deep recession with large negative effects for the global economy,” Mr Swan said.

“Despite the turbulence in the global economy, the OECD forecasts the Australian economy is still expected to grow substantially faster than its peers, with growth of 4.0 per cent in 2012 and 3.2 per cent in 2013,” he added.

“The OECD expects Australia’s unemployment rate to tick up slightly to 5.3 per cent in 2012,” he said.

However Mr Swan said: “this is much lower than the 8 per cent unemployment rate expected for the OECD area as a whole.”

The Treasurer said this reflects the strong economic management that saw Australia avoid recession during the global financial crisis and continue to create jobs through the recovery.

“The OECD states that Australia’s “unemployment is expected to stay low and underlying inflation contained as the remaining slack in the economy gradually disappears,” he said.

The OECD firmly endorses Australia’s budget strategy, noting that “stringent spending control, consistent with the Government’s plans, is still necessary to offset the revenue declines induced by the financial crisis and natural disasters.”

If global conditions deteriorate significantly, the OECD notes that Australia has room to move on monetary policy as well as the ability to provide fiscal support should it be necessary, due to our very low level of public debt.

In these uncertain times for the global economy, the Government recognises the importance of striking the right balance between budget discipline and continuing to support job creation and growth.  Just as it would be wrong to abandon our determination to return to surplus in 2012-13, it would also be counterproductive to take an axe to the budget.

Strong and stable economic management, and our record of fiscal discipline, remain very important for Australian families across the country, helping underpin confidence and supporting Australian jobs.

What we do have to learn

“The only thing we have to fear is fear itself.”

Those wise words of Franklin Roosevelt are worth recalling right now.

The world, once again, is extremely unstable, as it was back in the 1930s.

What most have forgotten, though, is that the world made substantial progress between the Great Crash of 1929 and 1937.

But contractionary policies,introduced then, created fresh, deep, recessions.

President Roosevelt saw that danger – and spoke out against it.

His words have fresh resonance now, with the Treasurer, Wayne Swan, grimly determined to deliver a surplus budget, next year.

Mr Swan, himself, is aware of the risks.

That is why he says he won’t “take an axe” to Federal spending, in the new financial year, even though he concedes that he will be facing “difficult choices.”

But with no end in sight to European debt worries, risk levels remain high.

At 5 per cent, Australia’s unemployment rate  is spectacularly good, by world standards.

But with Australians now snapping their wallets and purses shut,  that  rate could rise very suddenly.

Mr Swan has achieved some remarkable feats, in the wake of the global economic crisis.

His greatest challenge, though,  still lies ahead.

That is maintaining a quiet confidence, particularly over the year to come.

This won’t be easy.

So what can be done?

The Australian Council of Social Service has some useful ideas.

It is suggesting that Mr Swan should focus on cutting wasteful and poorly targeted spending, as he prepares his new budget.

ACOSS CEO, Dr Cassandra Goldie, says the government should also look for un-necessary or unproductive tax breaks.

The council would also like to see revenue from the new minerals resource rent tax invested in social and affordable housing.

Although it might sound radical, that suggestion is well in line with the government’s stated objective of spreading wealth generated by the mining boom throughout the broader community,

Summarising her case, Dr Goldie said:“A balanced approach should be taken to removing waste from both the tax and expenditure sides of the Federal Budget, rather than any attempt to cut important community programs.

“Indeed, most of the waste lies hidden from view in tax concessions, which mainly benefit high income earners and are not scrutinised as carefully as direct expenditures,” she added.

Tempting words.

Why your rebate’s at risk

The Federal government is likely to revive its plan to means test the present private health insurance rebate.

This is a direct result of Julia Gillard’s victory last week, in elevating a former Opposition member, Peter Slipper, to the Speaker’s chair in Federal parliament.

That has given her minority government one extra vote, as the former speaker, Harry Jenkins, will be returning to the floor of the House, to vote with fellow Labor members

It also takes a vote from the Opposition, as the Speaker traditionally abstains from voting on major issues, in normal circumstances.

The government has made no secret of its belief that the rebate should be means tested.

However, it has been unable to apply that test, so far, because it did not have the numbers to push that measure through parliament.

Its ability to do that is still in doubt, but the task will, at least, be easier, with just three independents, instead of four, to convince.

And the government is under pressure, on all sides, to find whatever savings it can, to get its budget, for the new financial year, into surplus.

The Treasurer, Wayne Swan, admits that instability on world financial markets is slowing parts of the Australian economy.

That reduces revenue flows.

The government has already shown that it is prepared to resort to unattractive options, to raise extra cash, as it did with its deferral of a promised tax break, on overseas bank transactions.

The government will be sorely tempted to means test the private health insurance rebate.

The rebate cost it $3 billion in 2004-05.

So it’s a big ticket item.

It would, of course, face bigger bills for public hospital treatment, if it did so.

However those would be  much lower than the savings it would make on the rebate.

And Mr Swan is making no secret of the fact that he believes he is trapped between a rock and a hard place, right now.