OECD Economic Surveys: Australia 2014

OECD

• Publisher: OECD
• Year: 2014
• eBook ISBN: 9789264227934
• Topic: Social Sciences
• Subtopic: Sociology
• Index: Social Sciences

Thematic chapters

Chapter 1. Improving taxes and transfers

Getting tax and transfer systems to efficiently deliver sufficient revenues to achieve macroeconomic targets, address goals in re-distribution and social welfare, encourage employment, accommodate business-competitiveness concerns and incorporate environmental issues is difficult. In Australia, slowing economic growth in the wake of the mining boom has sharpened the trade-offs and brought into focus the importance of encouraging broad-based advances in employment and productive capacity while also dealing with other long-term challenges, in particular population ageing and greenhouse-gas emission reduction. This review particularly recommends shifting away from income taxation to indirect taxation, for instance by raising more revenue from the Goods and Services Tax. The report also advises caution in some recent welfare-reform proposals, and advocates broad support for business rather than targeted subsidies and other forms of corporate welfare. As regards environmental policies, the report comments on the proposed Emission Reduction Fund for reducing greenhouse gases and supports reform to vehicle-related taxation.

Taxes and transfers are key tools for addressing economic, social and environmental issues, including achieving fiscal targets, creating a competitive business environment, motivating employment, and ensuring adequate levels of welfare. Given the multiple facets of tax and transfer policies, making the most of “win-win” opportunities and having a good gauge of trade-offs where these occur are keys to sound policy. In Australia, the end of the resources-investment boom, population ageing and a need for broad-based productivity growth mean effective tax and transfer systems are all the more important. This chapter evaluates current policies and plans for the future and concludes with a series of recommendations.

Notable features of the system

Australia’s tax and transfer system has a number of striking characteristics:

• Government spending has long been relatively low compared with many other OECD countries, and this is echoed in the relatively light overall tax burden. Since at least the mid-1990s total government revenues have ranged between 25% and 30% of GDP (Figure 1.1, Panel A); the OECD average is around 35%. As in many other countries, both individual and corporate tax revenues have dipped as a share of GDP following the global financial crisis (Figure 1.1, Panel B).
• Regular income tax on households and businesses features prominently and comparatively little revenue is collected from indirect taxes, which is less employment and growth friendly. Indeed, as a proportion of GDP, indirect-tax revenues rank among the lowest in the OECD area, while revenues from income taxes on both households and corporations are among the highest (Figure 1.1, Panel C).
• Spending on welfare transfers is low in international comparison. Though public social spending has risen somewhat over recent decades (Figure 1.1, Panel D), it nevertheless has remained clearly below the OECD average.
• As regards support for business, in common with many other countries, encouraging R&D activity is a core theme of the various programmes and incentives. However, Australian business policy has concentrated rather less than other countries on cutting the rate of corporate income tax as a means of attracting investment and has a history of subsidising struggling industries (notably automobile plants).
• Taxes and transfers are a key dimension in federal-state relations (see Chapter 2 of this review). Broadly, the Commonwealth (central) government plays a greater role over taxes and transfers than do state governments; the latters’ own revenues cover only about half their outgoings with federal-government grants making up the difference. In addition, practically all cash benefits to households are federally run; the states, in contrast, have considerable responsibilities in service provision, in particular much of health and education.

Figure 1.1. Tax revenue and social spending indicators

As a percentage of GDP

1. The ranking indicator re-scales rankings so that 0 is the lowest ranked country and 100 is the top ranking country. The rankings are based on the shares of revenue in GDP. 2011 or latest available year, except for corporate tax which is based on the average of the previous seven years to reduce the influence of cyclical variation.

Source: OECD (2014), Tax Revenue Database and OECD (2014), Social Expenditure Database.

StatLink http://dx.doi.org/10.1787/888933176581

Key challenges

Australia’s challenges for tax and transfer policy comprise several inter-related issues:

• Identifying the economically least damaging measures to raise revenue and restrain public spending to achieve deficit and debt reduction.
• Getting taxes and transfers to help growth potential by encouraging labour supply, and enhancing the climate for business activity in other respects.
• Ensuring the taxation of natural resources brings an appropriate return to the public as ultimate “owners” of Australia’s natural resource wealth.
• Using the tax and transfer system to help reduce poverty and inequality.
• Improving the tax system’s environmental characteristics.

The following sections first briefly discuss the present government’s intended approach to taxes and transfers. Subsequent sections discuss the best way forward for policy und...

Table of contents

• Title page
• Legal and rights
• Foreword
• Executive summary
• Assessment and recommendations
• Annex Follow-up to previous OECD policy recommendations
• Thematic chapters
• Acronyms and abbreviations used in this survey
• About the OECD