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Is the fiscal policy setting appropriate?
Adherence to the fiscal target of budget balance over the cycle is important, largely because of the objective of improving the level of national saving over time, reinforced by the medium-term pressures arising from an ageing population and also the difficulty of unwinding discretionary increases in spending. As regards the near-term, the May 2004 Budget projects an underlying cash surplus of 0.3 per cent of GDP in 2004-05 and additional small surpluses in the forward years, after delivering further tax cuts and increased family assistance under the More Help for Families package.
Underlying cash balance (1)
As a percentage of GDP
1. As at the end of financial year. There is a break in the series between 1998-99 and 1999-2000. Data for the years up to and including 1998-99 are consistent with the cash Australian Bureau of Statistics (ABS) Government Finance Statistics (GFS) reporting requirements. From 1999-2000 onwards, data are derived from an accrual ABS GFS framework.
2. Consolidated general government includes Commonwealth, and State/local governments and universities.
Source: Australian Government.
The medium-term anchor for fiscal policy is achieving balance over the cycle. The Australian Government (Commonwealth Government) also targets cash surpluses “while growth prospects are sound”, as it is expected to be over the next few years. This policy of aiming at small surpluses when the economy is operating at or close to potential is appropriate at present, provided that it is accompanied by further personal tax reforms.
Both budget consolidation and asset sales have resulted in a sharp reduction in the Australian Government net debt since the mid-1990s. The prospect of its elimination over the medium term raises the question of whether to maintain the government bond market and how to allocate the improving net position. Following a public review in 2002, the government decided to maintain the Commonwealth Government Securities market, given both the important role it plays in the efficient management of interest-rate risk and the wish to preserve diversity in financial markets. Consistent with a strategy of containing fiscal pressures arising from population ageing, the government now envisages the setting up of a “Future Fund”, financed from future budget surpluses and revenues from asset sales to meet unfunded superannuation liabilities of civil servants – estimated at 10½ per cent of GDP in 2004-05. The fund would have outside managers and be invested in a diversified portfolio. The decision to purchase assets raises difficult questions about the regulation and administration of such a fund, with cross-country experience providing only limited guidance.
General government net debt (1, 2)
As a percentage of GDP
1. As at the end of financial year.
2. Includes the impact of the further sale of the government's shareholdings in Telstra.
3. Consolidated general government includes Commonwealth, and State/local governments and universities.
Source: Australian Government.
Is there a need for further tax reform?
Following the introduction of a modern and broad-based goods and services tax and various improvements in business taxation in recent years, including a less complex and more internationally competitive tax regime, there is still unfinished business in the area of tax reform. A large gap between the top personal marginal income tax rate and the company tax rate creates an incentive for a redefinition of personal income as company income. Also, while the maximum marginal income tax rate is around the average by international standards, it cuts in at a relatively low income level, which may harm work incentives and discourage skill acquisition. An additional important issue is that of effective marginal tax rates which, despite recent reforms, remain high for many low income earners, deterring labour force participation, including by secondary earners and older workers. The priority for tax reform should be the simultaneous continuation of policies which contribute to the lowering of these high effective marginal tax rates, and the raising of the threshold at which the maximum marginal income tax rate cuts in, consistent with budgetary objectives. A rapid abolition of remaining distorting State taxes, as well as a reform of the narrowly-based and exemption-ridden payroll tax also under the States’ jurisdiction would further increase the efficiency of the Australian tax system and improve resource allocation.
Top marginal personal income tax rates for employees (1)
Key to abbreviations:
Combined=the combined central government and sub central government (top marginal) rate, calculated as the additional central and sub central government personal income tax resulting from a unit increase in gross wage earnings.
All in=the all in (top marginal) tax rate, calculated as the additional central and sub central government personal income tax, plus employee social security contribution, resulting from a unit increase in gross wage earnings.
APW=average production wage (in national currency), meaning the average annual gross wage earnings of adult, full time workers in the manufacturing sector.
Threshold=the multiple of the APW at which the reported combined top marginal rate is first observed.
1. This table reports for each country the marginal combined personal income tax rate on gross wage income (derived according to the OECD Taxing Wages framework) for a single person without dependants based on the earnings level where the top statutory rate first applies.
2. This column reports the level of gross wage earnings (expressed as a multiple of APW) at which the top marginal combined personal income tax rate is reached.
Source: OECD Tax Database.
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