CPA Australia

Chris Richardson

19 November 2015

The big picture: World income shares

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1950

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Japan

United States

Western Europe

India

China

That plays Australia’s way …

Investment spending as a share of 166 different economies

But China is only part way through a tricky transition

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1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 100

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China

China’s share of global consumption by commodity

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Oil

Economy (GDP)

Uranium

Wheat

Population

Corn

Gold

Rice

Steel

Copper

Coal

Nickel

Aluminium

Concrete

China's share of global consumption

China’s tricky transition

• China’s economy is transitioning towards more sustainable growth: away from reliance on infrastructure and more towards consumer spending.

• China’s slowdown still had further to run, even though growth has already dropped to the lowest in a quarter of a century. That’s why Chinese authorities continue to step more firmly on the stimulus accelerator.

• China’s challenges remain central to Australia’s future:• The working age population is shrinking due to the ‘one child policy’• Corruption remains endemic• The housing bubble is deflating • The ‘catch up’ potential that once powered China’s growth engine is now

less of a driver that it once was (the technology gap between China and the developed world is narrowing)

• The Chinese sharemarket took a hit, and the mad scramble by the authorities in response shows they are nervous.

China leads Australia’s top 10 trading partners

Source: Department of Foreign Affairs and Trade

0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000

Germany

Thailand

Malaysia

UK

NZ

Singapore

Korea

US

Japan

China

2013-14 2012-13 2011-12

Two-way trade, $A (millions)

-1.0%

-0.5%

0.0%

0.5%

1.0%

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2.5%

1980s 1990s 2000s to 2013 Decade to 2023

Productivity & other Participation

Terms of trade Total living standards

Contribution to annual income growth

Australia’s future productivity challenge

The WHY of tax reformLiving standards depend on productivity growth

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-0.5%

0.0%

0.5%

1.0%

1.5%

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1980s 1990s 2000s to 2013 Decade to 2023

Productivity & other Participation

Terms of trade Total living standards

Contribution to annual income growth

The WHY of tax reform – 2

Recent real net national disposable income per head trend is down

$30,000

$35,000

$40,000

$45,000

$50,000

$55,000

1992 1997 2002 2007 2012

And some key tides are changing

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1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023

Real engineering construction to GDP ratio

The terms of trade (RH axis)

Share of economy Terms of trade index: 2012-13=100

Meaning construction tides are changing too

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1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 2021 2024

Real commercial construction-to-GDP ratio

Real engineering construction-to-GDP ratio

Share of economy

That affects Australian national income growth

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1990 1994 1998 2002 2006 2010 2014 2018

Annual nominal income growth (%)

But interest rates are helping

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1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Standard variable mortgage rates

90 day bank bill rates

10 year bond yields

And so too is the Australian dollar

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1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

World commodity export prices (index)

TWI exchange rate (RH axis)

While wage growth has dropped

2.2%

2.4%

2.6%

2.8%

3.0%

3.2%

3.4%

3.6%

3.8%

4.0%

4.2%

1998-99 2001-02 2004-05 2007-08 2010-11 2013-14

The sectoral leaderboard

-4% -2% 0% 2% 4% 6% 8%

Manufacturing

Farm

Construction

Transport & storage

Public administration

Utilities

Education

Business services

Wholesale and retail

Information services

Property services

Recreational services

Health

Finance and insurance

Mining

Change in output, %, 2015-16

Eastern States leading domestic demand

-4% -3% -2% -1% 0% 1% 2% 3%

WA

NT

ACT

SA

QLD

NSW

TAS

VIC

% change on year eariler, 2015-16

State final demand growth, %

Mixed picture for growth in the ACT

1%

2%

3%

1987-88 1990-91 1993-94 1996-97 1999-00 2002-03 2005-06 2008-09 2011-12 2014-15 2017-18

ACT - shares of national totals

Output Population Retail Housing investment

The US starts a global lift in interest rates

Keep an eye on fair value

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1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Housing prices and national income

Housing prices National income

Index: 1986 = 100

Which is looking toppish

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-9%

-6%

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1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Housing over- and under-valuation relative to national income

The HOW of tax reformShift from ‘bad’ to ‘good’ taxes (raise on the left, cut on the right)

Tax reform can boost living standards if we rely less on taxes that hurt the economy the most.

How much prosperity is at stake? The maths is pretty simple. The extent to which tax reform makes Australians better off comes down to:

The dollars shifted from ‘bad taxes’ to ‘good taxes’, multiplied by

The gap in economic costs between ‘good’ and ‘bad’ taxes.

Bad taxes include State stamp duties on business and residential conveyancing, insurance taxes and royalties, as well as Federal company tax.

Good taxes include taxes such as the GST or broadly-based land taxes.

Tax reform is mostly about prosperityBut fairness needs a look in too

For fairness, super is the standoutGive everyone the same tax benefit from putting a dollar into super

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Current incentives to invest in super Proposed incentives to invest in super

Percentage points

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