Australia's Future Tax System

Architecture of Australia's tax and transfer system

1.2 Emerging challenges and opportunities

The review is being conducted at a time of significant social, environmental and economic challenges. Some of the challenges are driven by international circumstances, some domestic. To deal with these challenges cooperation across levels of government is needed. At its meeting on 3 July 2008, the Council of Australian Governments (COAG) noted the need to continue to progress reforms to boost productivity, increase workforce participation and mobility, and deliver better services for the community. COAG is progressing work on a wide range of fronts, including business deregulation and competition, health and ageing, education and training, housing, indigenous policy reform, infrastructure, climate change and water. These reforms will be underpinned by a new financial relations framework. Much of this work recognises that the States deliver, or at least facilitate, many of the services required by Australians, yet the Australian government raises the largest share of tax. The COAG reforms do not contemplate fundamentally redressing this imbalance.

A key driver of the urgency of COAG's reform agenda is the likely slowing of economic growth, due to our ageing population. This demographic challenge is profound. The second Intergenerational Report (IGR), released on 2 April 2007, makes clear that as our population ages the proportion of people in the workforce will fall. This has significant implications for economic growth and our future standards of living. Over the next 40 years economic growth is projected to slow, with growth in real per capita gross domestic product (GDP) to average 1.6 per cent per year compared with 2.1 per cent over the past 40 years. A quarter of the population is projected to be aged 65 or over by 2047 (almost double that today). Consequently, spending pressures in areas such as health, age pensions and aged care are projected to rise considerably.

Climate change is likely to generate significant costs, affecting the lives of all Australians. These costs will only increase with delay in mitigation activity. Recognising this, the Australian Government has committed to introducing a Carbon Pollution Reduction Scheme to curb greenhouse gas output in Australia. The Australian Government's Green Paper (Australian Government 2008c) sets out how the scheme will operate, including the preferred approach regarding the allocation of pollution permits and the nature of assistance for households and industry.

Given Australia is a small, open and developed country operating in an increasingly globalised world with freer flows of ideas, investment and labour, there is increasing pressure for Australia's tax‑transfer system to remain internationally competitive. This is particularly important for the taxation of investment income because of the ease with which investment can be switched between alternative activities and locations, and the capacity to shift profit between jurisdictions. Of course, tax is not the only determinant of international investment decisions (a skilled workforce and high quality infrastructure are also significant), but it is nonetheless important.

Intrinsic to the policy responses to these issues is the nature of our federation. Coordinated action across governments is important. For example, COAG has acknowledged that Australia's overlapping and inconsistent regulations on business impede productivity growth. COAG noted that without change, Australia's future living standards would be compromised, the competitiveness of the economy reduced and our ability to meet the challenges posed by an ageing population diminished. Benefits of coordinated action should be balanced, where appropriate, with the need for States to tailor arrangements to be relevant to local issues.

These challenges are substantial and interact in complex ways with the tax‑transfer system. The review provides an opportunity for shaping the tax‑transfer system in ways that position Australia to address these challenges.