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Anthony Albanese has been sworn in as Australia’s 31st Prime Minister, marking the formation of a new government. This development comes in an environment rife with challenges and few straightforward solutions. Here, we explore the policies of the government and their implications for the economy.
Economic Priorities of the New Government
The new government has emphasized its economic focus on “creating jobs, boosting participation, improving and increasing productivity, generating new business investment, and increasing wages and household incomes.” To this end, a second Federal Budget is expected in October, which will outline the fiscal policy direction.
While the government has stated its commitment to growing the economy rather than increasing taxes, it faces the delicate task of balancing growth with inflation. Treasurer Jim Chalmers has indicated that the Government will redirect spending from unproductive to more productive areas. Treasury Secretary Dr. Steven Kennedy highlighted that inflation—at 5.1% in the March quarter of 2022, its highest in two decades—is driven by global and domestic factors, such as:
- Increased global demand for goods, straining supply chains and elevating shipping costs;
- The Russian invasion of Ukraine, which has surged oil, energy, and food prices. Together, Russia and Ukraine account for about a quarter of global wheat trade;
- China’s zero-COVID policy, which has disrupted supply chains.
In Australia, energy prices have significantly contributed to inflation, with the temporary reduction in fuel excise set to end on 28 September 2022. The new government is tasked with addressing these economic pressures.
Personal Income Tax Under the New Government
The 2019-20 Budget introduced personal income tax reforms, with Stage 3 of these reforms scheduled to take effect on 1 July 2024. This stage simplifies tax brackets by merging the 32.5% and 37% rates into a single 30% rate for incomes between $45,001 and $200,000. Prime Minister Albanese has assured that these legislated changes will not be altered, emphasizing the importance of tax certainty.
Tackling the Deficit: Where Will the Money Come From?
The new government faces the monumental task of addressing a $1.2 trillion deficit. Finance Minister Katy Gallagher has stated that Treasury and Finance are working through the Budget line by line to identify areas for sensible savings, aiming to return these funds to the Budget.
Multinational Tax Reforms by the New Government
Multinational corporations’ tax contributions were a central theme during the election campaign. The new government plans to align with the OECD’s two-pillar framework, ensuring that multinational enterprises (MNEs) are subject to a minimum 15% tax rate from 2023. Australia, along with 129 other nations representing over 90% of global GDP, has endorsed this framework.
Key elements of the new government’s policy include:
- Capping debt-related deductions by multinationals at 30% of profits, consistent with OECD recommendations, while retaining key tests like the arm’s length and worldwide gearing ratio;
- Preventing abuse of Australia’s tax treaties for intellectual property held in tax havens from 1 July 2023, denying deductions for such payments;
- Introducing transparency measures, such as reporting on tax information, beneficial ownership, tax haven exposure, and compliance with government tenders.
These reforms, following consultation, are expected to take effect in 2023.
Superannuation: No Changes to SG Rate Increase
The new government has not altered the scheduled increase in the superannuation guarantee (SG) rate. The SG rate will rise to 10.5% on 1 July 2022 and will continue increasing by 0.5% annually until reaching 12% on 1 July 2025.
The new government faces a challenging economic landscape with inflation, global supply chain disruptions, and a significant national deficit. By prioritizing job creation, productivity, and multinational tax reforms, the Albanese administration aims to address these challenges while fostering economic growth. As the new government’s policies take shape, their impact on the economy will be closely watched.
Read this great article from The Australia Institute.
