Greg Combet (Charlton, Australian Labor Party, Parliamentary Secretary for Defence Procurement) Share this | Hansard source

I rise to speak in support of the Tax Laws Amendment (Personal Income Tax Reduction) Bill 2008. It is delivering on another one of the Rudd Labor government’s election commitments. The tax relief provided by the bill is economically responsible and delivers real benefits to working families. The tax cuts, especially the increase in the low income tax offset, will improve the performance of the economy and attack inequality.

From 1 July this year, the government will increase the 30 per cent marginal tax rate threshold so that the 15 per cent marginal tax rate will apply on up to $34,000 of income, an increase in the threshold of $4,000. In addition, the low income tax offset will be increased from $750 to $1,200. It will continue to phase out at 4c for every dollar of income above $30,000. That means that those who are eligible for the full low income tax offset will not incur a net income tax liability until their annual income exceeds $14,000—an especially important initiative for low-income earners.

For the first time, from 1 July 2008, low-income earners will receive half the benefit of this offset through their regular pay, which will be important in household budgeting, rather than receiving the total as a lump sum when their income tax returns are assessed. This will have a more practical impact on working families attempting to run their weekly budgets and will provide a more visible incentive to participate in the workforce.

Further tax cuts will apply from 1 July 2009, including an increase in the 30 per cent marginal tax rate threshold so that the 15 per cent marginal tax rate will apply on up to $35,000 of income. In addition, the 40 per cent marginal tax rate will be reduced, under the bill, to 38 per cent. The low income tax offset will be increased on 1 July 2009 from $1,200 to $1,350. This means that those eligible for the full low income tax offset will not incur a net income tax liability until their annual income exceeds $15,000.

From 1 July 2010, the threshold for the 30 per cent marginal tax rate will increase so that the 15 per cent marginal tax rate will apply on up to $37,000 of income. In addition, the 38 per cent marginal tax rate will be reduced to 37 per cent and the low income tax offset will also be increased from $1,350 to $1,500 from 1 July 2010. This means that those eligible for the full low income tax offset will not incur a net tax liability until their annual income exceeds $16,000.

These tax cuts will help the nation face the economic challenges confronting it today. We are—as we have heard on many occasions, but the point needs to be underlined—facing a great challenge with the highest underlying inflation rate in 16 years. We in the Rudd government have inherited this legacy from the previous Howard government, which squandered a once in a generation opportunity. Unless we can address these longer term issues, we will face even more serious constraints on future growth and competitiveness, at tremendous cost to Australian living standards. We have demand rising faster than supply and there are only two ways to rectify this. One way is to increase inputs, capital and labour so that output will more closely approximate demand in the economy. The second way is to increase productivity. Increasing the labour supply is a key component of the government’s five-point plan to tackle inflation. Labour shortages are now widespread in the economy and in numerous surveys employers list skills shortages as the No. 1 constraint to business investment and expansion. You find that in large, medium and small businesses across the country.

The tax reforms contained in this bill will significantly improve the financial incentives for second-income earners and those on welfare benefits to make the transition into the workforce or increase their hours of work. These incentives will be reinforced by other measures to be implemented by the government, which I will refer to in a short while. Economic modelling undertaken by the Treasury indicates the personal income tax reforms alone will lift aggregate labour supply by around 65,000 persons in the medium term. This increase in workers, together with the increase in the effort of existing employees, will make available around 2.5 million additional hours of work to the economy each week. Incentives to increase labour force participation are vital if we are to attack the supply side constraints that are plaguing the Australian economy. These constraints have existed and been evident for some time. The previous government did not attend to them and this is widely regarded as one of the causes of the inflationary pressure that the country now faces.

Our labour force participation rate among 25- to 54-year-olds—that is, the prime workforce—slipped from 19th best in the OECD in 1994 to 20th in 2006. Over the last 12 years, Australia only managed to increase the labour force participation rate among 25- to 54-year-olds by 3.3 per cent. Our performance in lifting the labour force participation rate amongst men was even worse. In the 12 years to 2006 the participation rate amongst men in that category fell by 1.3 per cent, dropping Australia from an ordinary 22nd in the OECD to a disgraceful 26th, or fifth worst in the developed world. Australia’s female labour force participation rate is only the 12th best in the OECD. We are also in the middle of the pack in terms of the participation rate for older workers, with 12 developed nations ahead of us. To state the obvious, these are very problematic issues that confront the economy, especially considering that we have had 17 years of economic growth. That was a sustained period of growth, but we are now confronting some significant constraints.

You would expect that the growth we have experienced would be encouraging people back into the labour force, but public policy measures supporting that goal have been lacking. The tax cuts in this bill, most notably through the increases in the low income tax offset, will lift incentives for people to move from welfare to work, thereby placing downward pressure on inflation and interest rates.

Beyond increasing the participation rate, we need to examine how we can increase the number of hours people are working in the economy. I hasten to add that we should do that not necessarily by asking full-time workers to work longer hours but by developing policies to encourage part-time workers to take on more hours and to ensure that there are sufficient jobs for these employees and for people who wish to participate to a greater degree in the workforce.

I acknowledge that there are a lot of people who are happy to work part time; part-time work might suit their lifestyle and provide a good work-family balance. However, the evidence is that a significant number of part-time workers would like to work more hours per week. The latest ABS data found that one in five part-time workers, or 571,900 people, want more work. Fifty-seven per cent of these underemployed people would prefer to work full time. In addition, 46,000 full-time employees were put on short hours due to lack of work.

It should be noted that the proportion of men working part time, as a share of male total employment, is almost double that of the OECD average, and the female part-time proportion is 1½ times the OECD average. So there is a high incidence of part-time work in our labour force relative to other developed nations. The greater significance of part-time workers in the Australian economy saw the average annual hours worked per person in employment actually fall by 3.3 per cent between 1994 and 2006.

Reducing this underemployment in part-time workers is perhaps one of the fastest ways to increase our labour supply and relieve some of the inflationary pressure. If all the underemployed part-time workforce were able to work their ideal hours, this would add 325 million work hours to the national economy annually. This is the equivalent of finding almost another 200,000 full-time employees. Just imagine the impact on the labour supply and the inflationary pressure relief that would provide.

On the evidence available, the main obstacles to working these hours are lack of work, lack of skills and transport problems. The government are committed to addressing each of these three policy areas. The government will pursue the appropriate macroeconomic settings for maximum employment. We also have a comprehensive skills agenda, beginning with a plan for 450,000 additional training places. Furthermore, Labor are delivering on our commitment to establish Infrastructure Australia within 100 days of forming government. This organisation will audit our infrastructure needs and coordinate the provision of infrastructure. This will help improve the transport infrastructure of Australia. The interaction of these policy areas is an example of the effectiveness and necessity of a holistic policy approach, something the former government was unable to embrace.

While targeted tax cuts will add to the labour supply and thereby help relieve inflationary pressure, they will have other impacts that are quite counterintuitive. For example, the OECD has found that employment growth tends to be associated with lower average labour productivity growth. Thus, as the government encourages greater labour force participation, we must complement this with other policies designed to boost productivity.

Training is essential to this challenge. The OECD has estimated that a 10 per cent increase in the stock of human capital accumulated through job related training is associated with an increase of around 1.5 per cent in productivity. Thus, skills development not only helps to increase labour supply through new entrants and upskilling existing workers; it ensures that these additional workers will boost the productivity rate.

The Labor government, in its first 100 days, has commenced the measures necessary to implement its commitment to the rollout of trades training centres in all of Australia’s 2,650 secondary schools.

See this speech in context