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What business wants in the Budget



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What Business Wants in the Budget

Conditions are getting better, in large part due to the efforts made to balance the budget through spending cuts. A framework for growth has been created which is beginning to show large dividends. The aim now is to build on these foundations through reform o f the tax system and through further efforts to increase the adjustment capabilities o f the economy.

The economy has entered a recovery phase in large measure due to the efforts made to restore budget balance through expenditure reductions rather than increases in taxation. The effect of the cuts to public spending has been to transfer resources to the private sector and therefore into more productive uses.

It is crucial to establish that it was the restoration of an underlying balance which has been the single most important factor in putting the economy onto a stronger growth path. This improvement did not happen in spite of the cuts to government spending but because of them.

It will be important to keep the role of spending cuts firmly in mind since, as surpluses grow, there will be increasing pressure on the government to raise its level of spending. This would be an utterly inappropriate squandering of the improvement in Australia’s economic fundamentals which would impede the recovery process rather than enhance it.

Improving Australia’s Adjustment Capabilities

The focus for further economic reform must be placed on improving the adjustment capabilities of the economy. Even during the best of times, it is vital that an economy be capable of responding to shifts in the market. Whether driven by technological change, by the emergence of new markets and competitors or by a slowdown in activity amongst our trading partners, it is essential that the economy can respond to fluctuations in the structure of demand.

But these are not the best of times. The turbulence amongst our Asian trading partners will have major and lasting economic implications for the domestic economy.

The instability in Asia does not, however, mean a permanent reduction in output although there will be a fall in demand from our Asian trading partners over the medium term. The issue now for Australia is to ensure that the economy adjusts as rapidly as possible in response to these new sets of trading circumstance. Flexible institutions are crucial to ensuring the economy makes the most of its available opportunities.

The microeconomic reform agenda is founded on a recognition of the constant need for economies to adjust. Reforms in the areas of industrial relations, taxation, competition policy, the waterfront and coastal shipping are required. A continuation of the process of privatisation is required in which public sector assets, especially in the area of utility provision, are sold to the private sector. In summary, the direction which macroeconomic policy should take in the year ahead should have the following features:

=> on-going vigilance in regard to the budget deficit, => further public sector economies and further efforts to reduce the level of Commonwealth spending, => the application of surpluses as they accrue to the retirement of Commonwealth Government debt, => improvements in institutional arrangements which enhance the flexibility of the economy in the face of changing

circumstance, both domestic and overseas.

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In particular, flexibility needs to be enhanced through the introduction of appropriate changes in the following areas: industrial relations, taxation, the waterfront, coastal shipping, the provision of utilities, privatisation and corporatisation.

Taxation

The single most crucial area for change must be in the area of taxation. There are a number of measures which should be dealt with straight away:

• Capital Gains Tax Rollover - Clarification and flexibility are needed if the CGT rollover legislation is to achieve its potential economic benefits. • Provisional Tax - The Uplift Factor should be reduced to no more than 5%, and be formally tied to the officially expected inflation rate. Small businesses (and individuals) should be given the option to pay provisional tax by

instalments. • Compliance Costs - Compliance costs are too high and should be reduced. • Tax Simplification - The entry into force of legislation which rewrites the Income Tax Acts under the Tax Laws Improvement Program needs to be delayed so that the total rewrite can - from a single future date - replace the

existing law.

However, there is a need for genuine and comprehensive tax reform. ACCI recommends the adoption by Government of a comprehensive package of measures which:

• reforms Commonwealth/State fiscal relations, • introduces a very broad-based consumption tax (BBCT) to be levied at the lowest possible rate sufficient to replace indirect taxes on business inputs, • significantly reduces across-the-board average (and marginal) personal income tax burdens, based on reducing the

current high marginal rates faced by middle Australia, • reduces the top personal rate to the corporate rate at no more than the current 36%, • taxes employees for Fringe Benefits at their marginal rate, • limits Capital Gains Taxation to gains essentially of a speculative nature.

Employment Creation

Even with the recent fall in the rate of unemployment, there is no question that the labour market is running well below its potential. The following strong steps are required to lower unemployment and stimulate strong employment growth:

• maintain strong rates of economic growth, • introduce wider microeconomic reforms, • stimulate productivity growth while containing the cost of labour, • amend the social security system so that it does not discourage work, • continuously develop labour force skills and knowledge, • design labour market programs to meet individual needs, and • increase co-operation between federal and state agencies.

Industry Policy

For all government programs, clear objectives and performance indicators should be announced and there should be regular independent evaluations. It is important that industry be involved and influential in the development of these, and that implementation of changes to existing programs be carried out in a cohesive and transparent manner.

There should be an effort to pull together a “whole of government” statement on programs affecting all businesses (including tax expenditure) covering all relevant portfolios. As part of this work there should be a comparison of how Australia stands internationally in respect of the level of assistance to industry overall, and between different sectors of industry.

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