SECURE JOBS, TODAY & TOMORROW ACTU submission to the 2012-13 Federal Budget
February 2012
CONTENTS Executive summary
5
Economic conditions and the role of fiscal policy
8
Building a better Australia
14
Secure jobs for a better future
16
Paying for a better Australia
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ACTU Submisson to the 2012-13 Federal Budget
4
The ACTU The Australian Council of Trade Unions is the nation’s peak body for organised labour, representing Australian workers and their families. Any inquiries about this submission should be directed to the ACTU on (03) 9664 7333, or help@actu.org.au Web: actu.org.au
The Working Australia Papers The Working Australia Papers are an initiative of the ACTU to give working people a stronger voice about social and economic policy. Although low and middle income Australians ultimately bear the costs of poor policy decisions made in realtion to tax, infrastructure, retirement incomes, welfare and services, their voice is too often absent from national debates about these issues.
Working Australia Paper 1/2012 ACTU D 3/2011
Executive summary Australia’s economy has been a standout performer among developed nations for the past five years and has proved resilient to whatever shocks have been thrown at it, but as the Federal Government begins to frame the 2012-13 Budget, dark clouds are gathering on the horizon. Most of Western Europe remains mired in recession – exacerbated by government austerity measures - and despite some recent encouraging signs, the United States is fragile. The prolonged global slowdown continues to pose threats to Australia. Manufacturing and export industries are buckling under the weight of a dollar that has now leapt beyond parity with the Greenback. In this latter respect, Australia is a victim of its own success, with the dollar’s rise driven by the mining boom. And the mining boom itself is isolated to two states, leaving Australia’s economy looking like a patchwork quilt. It is in this context that the ACTU has prepared this submission to the 2012-13 Budget. The ACTU submits that the over-riding priority of the 2012-13 Budget must be to protect and sustain jobs in Australia. Early and comprehensive action by the Labor Government in late-2008 and early-2009 pre-empted the slowdown and provided the stimulus that sustained domestic demand and minimised job losses during the Global Financial Crisis. This remains an outstanding achievement that is recognised worldwide, if not fully appreciated domestically because of a cynical campaign by the Opposition for political gain. Strong fiscal rules, including a pathway to return to surplus, were integral in the 2008 and 2009 packages. The Government has publicly stated its goal of returning the Budget to surplus in 2013. The ACTU submits that given the uncertain global economic environment, the government must stand ready to adjust its fiscal priorities and its planned return to surplus in order to protect jobs, should the circumstances require it. The ACTU is not suggesting that the Government should abandon its fiscal rules, but rather that the timetable for tightening fiscal policy should be contingent on macroeconomic conditions. As we did last year, the ACTU notes that on the key measures of GDP growth and employment, Australia is outperforming its peers. Since the Labor Government was elected in 2007, 718,200 additional jobs have been created, and unemployment has averaged 5.0%. Australia has recorded average annualised GDP growth of 2.1% since March 2008. From a peak of 5% in September 2008, the rate of inflation is now 3.1%. The Reserve Bank’s cash rate is now 4.25%, compared to 6.75% in November 2007. In its statement of 7 February, following its decision to leave interest rates on hold, the Reserve Bank noted that the economic outlook for Australia was looking more positive than it had at the end of 2011. However, its stance remains that should the economy weaken materially, it is ready to ease monetary policy. The Government’s approach to fiscal policy must be the same. Notwithstanding this economic uncertainty, this submission highlights several expenditure priorities for inclusion in this year’s Budget:
ACTU Submisson to the 2012-13 Federal Budget
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  
Following the welcome financial support to fund wage increases for social and community sector workers, the Government should now provide an extra $1.6 billion a year to the aged care sector to lift wages there. The inadequate Newstart allowance of $234.85 a week for a single person must be raised immediately in a two-step process towards parity with the Age Pension. This would have an initial cost of $855 million a year. There must be a commitment to fund the National Disability Insurance Scheme. This will cost about $1 billion per year initially, rising to $4 billion in 2020.
The 2012-13 Budget must also prepare Australia for life after a commodities boom that will not last forever. Ongoing support to assist industries under siege from the high dollar to transform and remain competitive must be provided by Government. Manufacturing in Australia employs a million workers and generates billions of dollars in export earnings. It also has an important role in the development of skills and technology in Australia. About 200,000 Australians directly or indirectly rely on the car industry for their job, and unions commend the Federal Government for the $5.4 billion automotive transformation plan that will support them and their families. But industry planning and assistance should also be considered for other sectors which face pressure from the dollar and global issues, including tourism. To secure the gains from the boom for the next generation of working Australians, and to prosper in a climate constrained world, we need to put long-term sustainable job creation at the centre of economic policy. Secure jobs that pay decent wages and have workplace rights can be built on our economic strengths. Settings in the Federal Budget can play a role in achieving this goal. The 2012-13 Budget is also an opportune time for the Government to consider adopting elements of the jobs action plan the ACTU first presented to the Future Jobs Forum in October last year. This plan goes beyond support for industry to include a range of initiatives around the funding for public projects and procurement of services, job loss assistance and tracking, disincentives for offshoring of jobs, skilled migration, and effective labour rights. Most of these would have a negligible effect on the Budget bottom line. In preparing the 2012-13 Budget in accordance with its self-appointed target of restoring the surplus, the Government must avoid sacrificing workplace rights and decent pay and conditions on the altar of fiscal purity. Austerity measures in Europe have worsened and prolonged the state of the recession, cost tens of thousands of jobs, reduced essential services, and caused hardship for workers and their families. But this attitude is also on display closer to home. Liberal governments in Victoria and NSW have used the excuse of their fiscal position to attack basic workplace rights to collective bargaining, and to deny public sector workers pay rises in line with the costs of living. They have also announced plans to slash thousands of public sector jobs. While there is no doubt an ideological underpinning to this approach from Liberal governments, the federal government must be wary of going down the same path. Spending cuts must be justified, and not made solely for the sake of the bottom line. As the Community and Public Sector Union has warned, cuts are no cure-all for economic woes, nor an easy and painless way to balance the budget. The focus should not be on what cutting the public service would save, but on what we all lose as a result. The public sector has endured numerous rounds of cuts over the past decade or so, and each time, this has led to reduced services. But
ACTU Submisson to the 2012-13 Federal Budget
the reality is government spending, as a percentage of GDP, is low compared to other OECD nations. Like any other piece of infrastructure the public service needs to be maintained properly. In order to fund the quality social infrastructure and services that Australians require within the strict fiscal parameters the Government has set itself, the ACTU proposes several sources of additional tax revenues. At 25%, Australia has one of the lowest tax-to-GDP ratios in the OECD. The 2012-13 Budget should adopt several measures first proposed by the ACTU to the Henry Review and subsequently at the Tax Forum in Canberra last October. These revenues can be obtained, while preserving equity and efficiency from:
Large companies: Apart from the welcome introduction of the Minerals Resources Rent Tax, several billion dollars in revenues can be clawed back from excessive tax breaks for the mining industry, dubious offshore transfer pricing arrangements. Very high income earners: Progressiveness in Australia’s income tax system could be reintroduced by removing tax breaks and loopholes that favour the wealthy, including the structuring of trusts and deducations that reduce tax liabilities, the overly-generous superannuation tax concessions that favour the wealthy, and blatant tax evasion and avoidance. Sham contracting Billions of dollars in revenue is foregone every year in unreported earnings and avoidance by some Australia’s 1.1 million contractors, including through sham arrangements.
As stated earlier, Australia’s economy remains an envy of the developed world, however, this relative strength must not be taken as cause for complacency. Fiscal policy must remain appropriate for Australia’s economic conditions and outlook. But, we repeat, if conditions deteriorate further, the Australian Government must be prepared to modify its timetable for returning the Budget to surplus.
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Economic conditions and the role of fiscal policy Australia’s economy has proved resilient to continued turmoil that has pushed much of the developed world to the brink of a double-dip recession. This is not simply a matter of luck but of good management by the Government during the first Global Financial Crisis to sustain and stimulate demand and avoid a prolonged economic slowdown. Governments must be prepared to use the strength of their balance sheets to navigate economic ups and downs. If Australian economic growth slows further, the Government must stand ready to modify its timetable to return to surplus in order to protect Australian jobs. The collapse of Lehman Brothers in September, 2008, precipitated a financial crisis in the United States that spread throughout the global financial system. It soon became evident that this financial crisis would result in a deep recession in much of the developed world. As a result, the Australian Government enacted two fiscal stimulus packages designed to support economic activity and therefore protect Australian jobs during the period of global economic turbulence. These packages were highly successful. The unemployment rate in Australia reached 5.8% at its peak; a rate that is higher than desirable but nevertheless much lower than the rate in most other major developed nations even in 2012, over three years after the crisis. After making it through the acute phase of the global recession, Australian employment began to grow strongly from mid-2009. From August 2009 to November 2010, the number of employed Australians rose by 480,000, while the working-age population rose by 464,600. The employment-to-population ratio fell from 62.8% in August 2008, to 61.5% a year later. By November 2010 this ratio had returned to 62.6%, close to the all-time peak reached before the global recession. This strong jobs growth, while much of the developed world remained mired in recession, was a testament to the effectiveness of Australian monetary and fiscal stimulus and the industrial cooperation that saw hours of work reduced rather than employment. The further strong jobs growth of mid-2009 to late-2010 also demonstrates that the current industrial relations legislation provides no impediment to strong labour market performance. Figure 1 shows the relative strength of the Australian economy, and thus the labour market, in mid-2011. Australia’s unemployment rate was among the very lowest in the developed world (and remains relatively low).
ACTU Submisson to the 2012-13 Federal Budget
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Figure 1: Unemployment rates in the OECD, mid-2011 Spain Greece Ireland Estonia Slovak Republic Portugal Hungary Poland Turkey EU 27 United States Finland France Iceland Sweden United Kingdom Italy Canada Denmark Chile Czech Republic Belgium New Zealand Germany Luxembourg Mexico Israel Australia Japan Netherlands Austria Korea Switzerland
14.2 13.3 13.1 12.1 10.8 9.5 9.4 9.3 8.9 8.8 8.7 8.5 8.2 7.8 7.8 7.5 7.3 7.2 6.8 6.6 6.4 5.9 5.4 5.2 5.2 4.9 4.7 4.2 4.1 3.4 3.3 0
5
10
15
20.9
16.4
20
25
Source: OECD Stat
The Australian Government made it clear at the time that it announced the initial economic stimulus package in late 2008 that it intended to return the Budget to surplus as soon as it was prudent to do so. The fiscal rules outlined by the Government were summarised by the Treasurer as implying that “if we are going to be Keynesians in the downturn, we have to be Keynesians on the way up again�.1 Economic conditions and the outlook were sufficiently positive that the Government announced in 2010 that it intended to return the Budget to surplus by 2012-13, earlier than originally scheduled. However, macroeconomic conditions weakened in 2011 and the Australian labour market softened. The number of Australians in employment was the same in December 2011 as in December 2010, but the working age population had risen by over 225 000 people. As a result, the employment-to-population ratio fell by 80 basis points to 61.8%. This is now approaching the low point reached in the wake of the financial crisis, 61.5%. Employment growth since May 2008 is shown in Figure 2, below, compared with growth in the working age population over the same period. Another perspective on the same data is provided by Figure 3, which shows the employment to population ratio for working-age Australian adults.
1
Swan, W. 2011, Economic Note, No. 12, 10 April.
ACTU Submisson to the 2012-13 Federal Budget
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Figure 2: Employment and the working-age population from May 2008 (index) Index 107 106.6 106 105.3
105 104
Working age population
103 Total employment
102 101 100
99 May 08 Nov 08 May 09 Nov 09 May 10 Nov 10 May 11 Nov 11
Source: ACTU calculations based on ABS 6202.0, seasonally adjusted.
Figure 3: Employment to population ratio Per cent 64
63
62
61
60
59
58 2001
Source: ABS 6202.0.
2003
2005 2007 2009 Seasonally adjusted Trend
2011
ACTU Submisson to the 2012-13 Federal Budget
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These labour market developments are not cause for alarm, but they need to be watched carefully. Australia’s unemployment rate remains low, both relative to its historical levels and relative to the rates that are currently endured in most other advanced economies. However, this relative strength must not be taken as cause for complacency. Fiscal policy must remain appropriate for Australia’s economic conditions and outlook. If conditions deteriorate further, the Government must be prepared to modify its timetable for returning the Budget to surplus.
Debt is low and manageable Australia’s level of net debt is among the lowest of any advanced economy (figure 4). As Figure 5 illustrates, the IMF Fiscal Monitor projects that Australia’s net debt will peak at 9.4% of GDP in 2012 before beginning to fall. This contrasts with the United States, United Kingdom, France and Japan, all of which are projected to have net debt levels of greater than 80% of GDP within the next few years. Even Germany, often thought of as an exemplar of responsible fiscal policy, had a debt-to-GDP ratio of 57.2% in 2011. Figure 4: General Government Net Debt as a proportion of GDP Japan
130.6
Portugal
101.8
Italy
100.4
Ireland
98.8
France
81.0
Belgium
79.9
United Kingdom
72.9
United States
72.6
Israel
67.5
Iceland
67.1
Germany
57.2
Spain
56.0
Austria
52.5
Switzerland
50.8
Canada
34.9
Korea
30.8
Netherlands
30.6
New Zealand
7.8
Australia
7.7
Denmark
1.8 0
20
40
60
80
100
120
140
General Government Net Debt (Percent of GDP) Source: IMF Fiscal Monitor, September 2011. Figure shows the net debt level for advanced economies for which the net debt level is greater than zero and for which data is available.
ACTU Submisson to the 2012-13 Federal Budget
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Part of the reason for Australia’s low net debt, and its projected fall, is the commitment to balance the budget over the course of the economic cycle. However, this commitment implies that a deterioration in economic conditions will be met with looser fiscal policy, both through the automatic stabilisers and through discretionary policy, where appropriate. Australia’s low net debt level provides considerable fiscal room for looser policy if conditions warrant it. Figure 5: Projected net debt in advanced economies - 2011 to 2016 180 160 Japan 140 120 100 United States 80 United Kingdom 60 Germany 40 Canada
20
Australia
0 2011
2012
2013
2014
2015
2016
Source: IMF Fiscal Monitor, September 2011
Strong fiscal rules, including a pathway to return to surplus, were integral in the 2008 and 2009 packages. The ACTU is not suggesting that the Government should abandon its fiscal rules, but rather that the timetable for tightening fiscal policy should be contingent on macroeconomic conditions. The Government must be prepared to modify its timetable if conditions worsen. Economic outlook and government response There remains a significant chance that global growth will slow sufficiently that Australian output growth could slow or even fall. The possibility of another financial crisis, this time likely sparked by the Eurozone sovereign debt crisis, also looms. The likelihood of sluggish growth in the developed world, and the significant downside risks to even this unpleasant global outlook, caused the Reserve Bank and the Australian Government to revise down their forecasts for Australian growth in the latest Statement on Monetary Policy and Mid-Year Fiscal and Economic Outlook. Both the RBA and the Government forecast 3.25% growth for 2012-13, around the trend rate of real GDP growth. Recent analysis suggests that growth of around this level is associated with a stable unemployment rate.2 In other words, if real GDP growth is below the latest forecasts, then the unemployment rate will rise. Further deterioration in the economic outlook should therefore be a catalyst for the Government to reassess its fiscal stance.
See the estimation of the Okun coefficient for the Australian economy in the 2000s in Borland, J. 2011, ‘The Australian Labour Market in the 2000s: The Quiet Decade’, in Gerard, H. and Kearns, J., The Australian Economy in the 2000s, Reserve Bank of Australia, Martin Place, Sydney. 2
ACTU Submisson to the 2012-13 Federal Budget
Monetary policy clearly has a role to play in macroeconomic stabilisation, and the RBA has already moved to loosen its policy stance. Fiscal policy nevertheless remains important. The Government correctly recognised this in 2008 and 2009 with its prudent measures to stabilise the economy in the face of significant global turmoil. The lessons of this period should not be forgotten.
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Building a better Australia The government is to be congratulated on major reforms like the National Broadband Network and raising superannuation contributions to 12%, which will lay the groundwork for Australia’s future prosperity. Unions also support funding increases across the range of public services, including health, education, housing, transport and social inclusion, as well as better funding for the public sector which administers these programs. The ACTU Congress will consider priorities for public expenditure in further detail when it meets in May. However, there are a range of further expenditure measures which are needed to improve social infrastructure and services, protect jobs, promote equality, and build a better Australia for the future. We identified some of them in our last Budget submission, but repeat them again here.
Protection against disability The government should commit to funding the National Disability Insurance Scheme. One in five Australians, or around 4 million people, report having a disability. The current patchwork of medical and insurance schemes contain a number of gaps, which mean that many people face high out-of-pocket costs, or else fall through the gaps altogether. The government’s Disability Insurance Group has costed a National Disability Insurance Scheme at approximately $1 billion per year initially, rising to $4 billion per annum in 2020. At this cost, the scheme needs to be assured of adequate revenue. Unions believe the most equitable and efficient method of funding the scheme is through a small levy on all personal income tax similar to the way Medicare is funded, rather than out of consolidated revenue, which could mean cuts to other government spending. This would be money very well spent.
Fair wages for care workers The government should be commended for making $2 billion available to fund the wage increases that will flow from Fair Work Australia’s historic decision in the equal remuneration case for the social and community sector. Although this will go a long way towards improving wages in a key sector, improving the quality of social care, and reducing the gender pay gap, there are other sectors where these outcomes are also sorely needed. The government should commit to funding professional rates of pay in the aged care industry. Aged care unions are currently negotiating with the government as part of the Fair Work Act’s lowpaid bargaining stream for professional rates of pay for enrolled nurses and direct care workers in the aged care industry. These workers do hard work performing a vital service for some of our society’s must vulnerable people. Workers in the sector earn an average of $18 an hour - barely above the minimum wage and unions – supported by nursing home operators - are seeking modest and affordable wage
ACTU Submisson to the 2012-13 Federal Budget
increases of between $8-$10 per hour. Funding these wage increases in the aged care sector would cost approximately $1.6 billion per annum. Once again, we submit that this would be money very well spent; it could drive improvements in the quality of care for older Australians, and ensure a stable and permanent workforce in a vital and growing sector of the economy. ;3
Protection against unemployment The new year has not begun well on the jobs front. Although Australia’s headline unemployment rate continues to hover around 5%, several high-profile decisions to cut jobs have created a feeling of nervousness. These have included 350 manufacturing jobs at Toyota in Melbourne and 100 at Holden in Adelaide, 155 jobs at BHP Billiton’s Mount Keith nickel mine in Western Australia, and 1460 jobs at ANZ, Westpac and the Royal Bank of Scotland. The Global Financial Crisis confirmed that unemployment can strike any worker at any time, but currently the only support for unemployed workers is the Newstart Allowance and private savings. There is now a consensus that Newstart is too low. Not only the OECD, but even conservative economists such as Judith Sloan and Ian Harper have called for it to be increased. Last year we concurred with ACOSS that the first step should be to improve the single Newstart rate (which 60% of recipients receive), which is currently disgracefully low. It is currently $234.85 a week for a single person, which is only 18% of average weekly ordinary-time earnings. Lifting the single Newstart rate to two-thirds of the combined partnered rate would see it rise by $47.82 a week to $282.67 a week, costing approximately $855 million per year.4 This should be done as an immediate priority, with a medium-term priority of raising all Newstart rates to match equivalent Age Pension rates.
Assuming a $10/hour wage increase for 100,000 enrolled nurses and personal care workers, working 30 hours per week on average. Source: NILS, ‘A picture of the residential and community based aged care workforce 2007’ (2008) 12-13. 4 An increase of $49.53/week for the 60% of the 550,000 Newstart recipients who are assumed to receive the single rate: DEEWR, Labour Market and Related Payments (Dec 11); FaHCSIA, Pension Review: Background Paper, August 2008, 44. 3
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Secure jobs for a better future The commodities boom will not last forever. To secure the gains from the boom for the next generation of working Australians, and to prosper in a climate constrained world, we need to put long-term sustainable job creation at the centre of economic policy. Secure jobs that pay decent wages and have workplace rights can be built on our economic strengths. Secure jobs and incomes for Australian workers are essential to achieving a sustainable and equitable economy. Settings in the Federal Budget can play a role in achieving this goal. There is an ongoing role for governments to support industry so Australia’s economy and workforce remains diverse and skilled, and there is not an over-reliance on one or a few industries to drive economic growth and exports. This has become more crucial given the ongoing pressure on Australian manufacturing from the strength of the dollar. Unions welcome the Labor Government’s renewed commitment to industry policy, in particular the $5.4 billion automotive transformation plan. The Australian public support this level of assistance for manufacturing. The manufacturing industry is the fourth-largest sector in the Australian economy, employing 8.3% of the total workforce (at August 2011). The car industry alone directly and indirectly employs 200,000 Australians. Manufacturing not only creates jobs and export earnings, but contributes to Australia’s growing skills and technology base. Tourism and other sectors also face pressure from the high dollar and global factors, and should be considered for industry assistance programs. Governments should continue to invest in public sector jobs and services. Needless cuts to public sector employment may produce a temporary saving to the Budget bottom line, but will result in a decline of services that Australians depend upon. At the Future Jobs Forum in Canberra last October, the ACTU presented an action plan for jobs that is summarised below. We believe that these initatives should be considered as part of the 2012-13 Budget process. Most would have a modest, if not negligible, impact on expenditures.
Audit and independent review The Government should commission an independent review, led by representatives from unions, employers and key government departments, that is charged with identifying the scope that presently exists for all levels of Australian government to promote jobs in procurement practices and other forms of expenditure including grants and other programs. As part of its work the review should also audit the extent to which local trade-exposed industries currently benefit from public contracts.
Government funding for public projects and procurement services The minimum local content for spends should be defined by jobs created rather than money spent; granting price preference to Australian companies based on the whole of cost where the project is located in regional areas. Government procurement of services should be from preferred contractors/providers according to fair contracting principles, including compliance with International Labour Organisation conventions, the Fair Work Act, and agreed industry best practice programs, such as Clean Start and Ethical Clothing Australia. A high skills development and training agenda, including minimum numbers of training places, should be integral.
ACTU Submisson to the 2012-13 Federal Budget
Allowance should be made for an accelerated rate of depreciation on assets that include a specified percentage of Australian local content. Job loss assistance and tracking Where jobs are lost despite government and employer action, impacted workers must have access to a training allowance which encourages and facilitates meaningful retraining. Further, government should commission research to track the labour market outcomes and impact of redundancy for representative samples of workers who are made redundant.
Offshoring The tax system should be reviewed to remove any incentives for companies to offshore and instead create incentives for Australian and overseas companies to develop new capacity and target competencies in Australia (this is explained further in the next section of the submission). Introduce ‘right to know’ legislation that will enable domestic customers to support those companies that source their services from within Australia. Leverage the roll-out of the NBN to build competitiveness and productivity as part of strengthening regional job markets.
Skilled migration The use of 457 visas should be limited to categories of labour where there is a clear and ongoing shortage of appropriately-skilled workers in Australia. As a priority, the government should conduct an audit to identify if the numbers of 457 visas being issued are justified by reference to present labour market conditions.
Anti-dumping and fair trade Australia should seek to build on the establishment of the International Trade Remedies Forum to clarify the meaning and proper implementation of key WTO provisions, and commission a detailed examination of at-risk companies and communities to make recommendations that will help to maintain and expand manufacturing employment in those areas.
Effective labour rights All Australian trade agreements should include: a comprehensive commitment to core labour standards (embodied in ILO conventions) and acceptable conditions of work; a non-derogation clause and a commitment to continue to strive to improve labour standards; monitoring and enforcement of labour rights commitments, including dispute settlement procedures, and penalties if found to be non-compliant; effective governance and capacity building measures.
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Paying for a better Australia In order to fund the quality social infrastructure and services that Australians require, the government will need to raise additional revenues. Significant amounts of revenue can be obtained by implementing some of the government’s current agenda, including by abolishing the ABCC (saving $80 million per annum). However, much more needs to be done. The ACTU published four papers in 2011 that each provide detailed analysis of an aspect of our tax system. Based on this analysis, we believe that significant additional revenues can be obtained (while preserving equity and efficiency) from three main groups: large companies, very high income earners, and sham contracting arrangements.
Large companies Although the statutory company tax rate is 30%, the mean effective tax rate that companies pay (after tax concessions and exemptions) is only 22%.5 Foreign-owned mining companies, such as BHP and Rio Tinto, pay an effective corporate tax rate of only 13%.6 The proposed Minerals Resources Rent Tax will make a modest contribution to increasing the tax contribution of companies in the booming mineral sector. However, more needs to be done to ensure that the actual rate of tax paid by companies is closer to the 30% notional headline rate. This can be done by removing tax breaks for big companies, and cracking down on tax evasion and avoidance. In our paper, Rorts & loopholes, we identified almost $4 billion in tax breaks for the mining industry, including $2.5 billion in fuel tax concessions, more than half a billion dollars in depreciation concessions, and around $400 million in R&D concessions (for activities with only minimal ‘research’ content). The mining industry is immensely profitable and does not need these gifts from the Australian taxpayer. We also focussed on an estimated $5 billion in profits that are shifted offshore every year through dubious ‘transfer pricing’ arrangements. These manoeuvres cost the taxpayer $1.1 billion in lost revenue every year. The government should take stronger measures to crack down on transfer pricing, whether domestic or offshore, and should pursue back-taxes for companies that have engaged in the practice in the past.
Very high income earners In our paper Paying Our Way, we showed that the total tax rate for high-income earners fell from 38.3% in 2000 to 31.7% in 2010; this was the third largest fall of any OECD country. This equated to a real tax cut of more than 6% (or $12,000 per annum) for somebody earning $180,000 per annum (putting them in the top 1% of income earners). Cutting taxes for the wealthy decreases the progressiveness of the tax system and increases income inequality in Australia. The ACTU advocates removing tax breaks and loopholes that 5 6
A Race to the Bottom?: Globalisation & Company Tax Swan.
ACTU Submisson to the 2012-13 Federal Budget
favour the wealthy. First, wealthy people can structure their affairs to earn income as capital gains, trust distributions or dividends, which attract effective tax rates of 11-30% instead of the statutory 46.5% rate. They can also claim tax deductions for investment expenses and private health insurance costs. These loopholes cost the government more than $22 billion per year in revenue foregone. In order to combat these devices, the government should consider introducing a ‘Buffett rule’, which ensures that the average rate of tax paid by very high earners does not fall below a minimum threshold. Second, loopholes in the superannuation system that favour wealthy people should be closed. Currently, for every dollar that wealthy people contribute to their own superannuation fund, the government pays them 32.5 cents in refunded taxes. Ordinary taxpayers (everyone earning less than around $90,000) receive no such gift. Furthermore, superannuation investment returns are taxed at 15% or 31.5%, instead of the taxpayer’s marginal tax rate: this can save a high-income earner with a large account balance hundreds of thousands of dollars each year. ACOSS estimates that almost half of the $15 billion in superannuation tax concessions accrue to the top 12% of income earners; accordingly the magnitude of savings to the government should the concessions be reduced are obvious. The third source of revenue from the super-wealthy comes from the fact that very rich people continue to avoid and evade taxes. It is estimated that about $5 billion is hidden in offshore tax havens every year. The ATO’s Project Wickenby has recovered $2 billion of this money from 8000 people. However, it seems that most are let off with only a 5% tax penalty (which is lower than the interest earned on the money invested overseas); only 57 people have been charged, and 20 convicted, for criminal tax evasion. Another abuse is that the ATO complains that ‘many’ people who operate self-managed super funds (SMSF) — predominantly the wealthy — cheat on their taxes, for example by releasing superannuation money early, or entering into bogus transactions designed to minimise tax. The government should crack down on these abuses, and should significantly increase tax penalties for tax avoidance and evasion.
Sham contracting The final source of potential revenue comes from a sector with a reputation for tax avoidance: contractors. The ABS believes that between 9-27% of all income earned by unincorporated businesses is not reported to tax authorities. Indeed, of the 1.1 million contractors in Australia, fewer than 100,000 declared any contracting income to the ATO last year. An ATO audit of 22,000 contractors recently found that 51% had evaded tax (31% did not lodge a tax return, and a further 20% lodged a return but failed to declare any income); another audit of 11,000 contractors placed through labour hire agencies found that 73% of the contractors had evaded tax. Another enforcement action in 2008 found that the average income tax avoided was $18,800 per contractor. Given these figures, it is clear that if the government were to crack down on contractors, billions of dollars in evaded income taxes could be recovered. The government should also do more to ensure GST is collected by contractors and passed on to the ATO. It is important to note that many of these contractors are not even genuine contractors: they are ‘sham’ contractors, who are really employees but who are posing as contractors voluntarily, or because their employer requires them to. Of the 1.1 million contractors, 40% admit they do not
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ACTU Submisson to the 2012-13 Federal Budget
control their own work (which is the legal definition of an employee), 32% say they cannot subcontract the work, and 23% say they cannot take on work from a second client. And yet, of the contractors who lodge a tax return and declare contracting income, no fewer than 91% selfassess as meeting the test for being a ‘genuine’ contractor Clearly, the problems of sham contracting and tax evasion are intertwined. The ATO and the Fair Work Ombudsman should be resourced to work together to tackle the problem, from both a tax and a labour law perspective.