SUBMISSION TO IPART REVIEW OF STATE TAXATION€¦ · of 30,000 small, medium and large businesses and a network of 120 Chambers of Commerce. The members of NSW Business Chamber have

SUBMISSION TO

IPART REVIEW OF

STATE TAXATION

NOVEMBER 2007

CONTENTS

Executive Summary................................................................................................................ 1 Recommendations .................................................................................................................. 2 Background: Commonwealth-State Fiscal and Tax Arrangements ................................ 3 Matter 1: Given the existing GST agreement, assess the impact of the current

system of Commonwealth-State fiscal relations on NSW revenue mix and the ability of NSW to fund essential public services. ....................................... 3

The taxation mix ...................................................................................................................... 4 Division of fiscal responsibility .............................................................................................. 7 Matter 2: The efficiency of the taxes available to NSW and the Commonwealth........ 8

Matter 3: The existing NSW tax system according to standard taxation principles (that is, efficiency, equity, simplicity and transparency) as well as the interstate competitiveness of NSW taxes. ........................................................ 9

Efficiency ..............................................................................................................................................9

Competitiveness .................................................................................................................... 10

Matter 4: Options to improve the efficiency, equity, interstate competitiveness, simplicity and transparency of NSW tax system, given the taxes available to it. ........................................................................................................................ 13

Recommendations ................................................................................................................ 13 Sources for Figures .............................................................................................................. 14

References ............................................................................................................................. 14

NSW Business Chamber

Submission to IPART Review of State Taxation 1

Executive Summary NSW Business Chamber is a broad based employer organisation representing the interests of 30,000 small, medium and large businesses and a network of 120 Chambers of Commerce. The members of NSW Business Chamber have identified that the interplay between the NSW and Commonwealth Governments on taxation has had a significant impact on business viability and growth and that Payroll Tax is a critical factor in the competitiveness of NSW. It is of concern to the NSW Business community that in 2007 there is a growing mismatch between Governments’ revenue raising capacity and responsibility for spending. The Commonwealth collects about 80% of tax revenue and is responsible for 56% of spending, whereas the states collect 16% of taxation revenue and are responsible for 40% of outlays. Accountability requires a closer connection between collecting revenue from taxpayers and being responsible for delivering services. NSW dependence on payments from the Commonwealth has notionally increased since 1999/00, with Commonwealth payments rising from 31.6% of NSW total revenues to 42.7% in 2005/06, while its own tax revenues have declined from 47.8% to 36.2% over the same period. Significant components of the State taxation base have been lost with the complete loss of franchise taxes (related to sale of goods) and the financial transaction taxes (FID). NSW Business Chamber has called for a Constitution Convention in 2008 to improve co-operative Federalism. This should include a review of taxation and service delivery interdependencies and reduce duplication and blame shifting. NSW is facing increased competitive pressure from the other States in attracting business and employment opportunities. That competitive pressure is reflected in the flow of people out of NSW. There are many factors contributing to that position, some such as the high $A and mining boom being the product of external forces, but regardless it only enhances the need for NSW to have a competitive tax position. NSW has the highest State payroll tax rate in Australia at 6.0%, compared with 5.05% in Victoria and 4.75% in Queensland – these being the two key competitors for NSW. The Commonwealth Grants Commission comparison of the revenue raising effort of the States indicates that, on an equivalent basis, NSW payroll tax has averaged 9% higher than in Victoria in the period 2000/01 to 2005/06, and 10.5% in 2005/06. Compared with Queensland, the payroll tax rate is about 25% higher. The result is a significant cross-subsidy from NSW taxpayers to the other States and effectively a larger cross-subsidy from NSW businesses to businesses in the other States. That cross-subsidy is at a cost to the competitiveness of business in NSW. The NSW Business Chamber seeks an outcome for the NSW business community, that as a consequence of this inquiry, there will be no new State taxes introduced or proposals to increase the rate of existing State business taxation.



Recommendations 1. To reduce the extent to which NSW businesses effectively subsidise other states which

reasonable observers would consider otherwise capable of providing adequate services, the NSW Government should continue its efforts to pursue reform of the Commonwealth Grants Commission system for distributing GST revenues to the States.

2. To improve accountability and efficiency in raising, distributing and spending taxation

revenue, the NSW Government should promote and participate in a 2008 Constitutional Convention on Commonwealth-State relations which would:

a. determine between the States and Commonwealth responsibility for the delivery

of services by a single level of government, and b. consider, in particular, transferring health to one level of government or the other.

The NSW Business Chamber supports Federal leadership on this issue as it cannot be addressed on a State-by-State basis.

3. To make NSW more competitive given that Victorian and Queensland tax rates are

lower, and unlike NSW, have been reduced in recent years, the NSW Government should undertake a three year program to cut the payroll tax rate to 5.25% and lift the threshold to $700,000. The Government should be aware that the tendency, politically attractive though it may be, to shift the tax burden from households to business is not costless.

4. To further improve NSW competitiveness given that land tax also contributes to the cost

of business, the NSW Government should progressively reduce the land tax rate. 5. To ensure community support for measures aimed at reducing congestion and

greenhouse gas emissions the NSW Government should review the benefit and impact of the parking space levy and if maintained, require a clear link between revenues raised and public transport improvements.

6. To finance the proposed cuts in business taxes the NSW Government should act on the

recommended expenditure reductions and efficiency improvements in NSW Business Chamber’s Kickstart NSW Report. It is implicit in these recommendations – which are aimed at improving NSW competitiveness – that existing tax rates should not be increased nor new taxes created



Background: Commonwealth-State Fiscal and Tax Arrangements Warren (2006) characterised Australia’s fiscal arrangements as comprising a “very high vertical fiscal imbalance (VFI) due to inadequate State tax powers and complex and high level equalisation (under the auspices of the Commonwealth Grants Commission).”1 Warren also noted that there has been a shift in the powers to raise revenue since the 1930s from the States to the Commonwealth. This has largely reflected political decisions: principally the decision by the States in 1941 to relinquish income tax powers to the Commonwealth, only partially offset by the Commonwealth decision in 1971 to transfer powers to raise payroll taxes to the States. In addition, High Court decisions have reduced the scope for indirect taxes on goods and services: for example, before being ruled out by the High Court, franchise fees constituted over 13% of NSW own tax revenues in 1999/00. The Commonwealth introduction of a broad-based goods and services tax (GST) from 2000/01 offered the opportunity for a major realignment of Commonwealth-State fiscal arrangements. However, in part due to the compromises forced on the Commonwealth Government to have the GST endorsed by the Senate, that opportunity was lost. The net position in 2007 is that the states have little control over a large portion of their revenues. The Commonwealth collects about 80% of tax revenue and is responsible for 56% of spending, whereas the states collect 16% of taxation revenue and are responsible for 40% of outlays. That is the States’ own-source revenues account for only 40% of their own-purpose outlays, relying for the balance on the Commonwealth (Warren, 2006). In relation to the allocation of taxes, the broadest tax bases – personal income, company profits and goods and services – are held by the Commonwealth. The States are forced to “rely heavily on relatively inefficient, narrow-based and sometimes highly cyclical transactions-based taxes”2. The major tax bases which the states are able to access are company payroll, property ownership (land tax) and sales (conveyancing), gambling, and motor vehicle ownership. Matter 1: Given the existing GST agreement, assess the impact of the current

system of Commonwealth-State fiscal relations on NSW revenue mix and the ability of NSW to fund essential public services.

A consistent issue for NSW has been the adverse effect of horizontal fiscal equalisation (HFE) conducted under the auspices of the Commonwealth Grants Commission (CGC). The current formula for distributing GST revenues involves nearly 400 variables which makes it incomprehensible except for those intimately involved with its calculation – in effect, because of that complexity, it amounts to a black box. In addition, it rewards inefficiencies and punishes better performance by States. In terms of outcomes, in 2005/06 it redistributed $2.2bn, equivalent to 5.1% of NSW total revenue or 14.1% of NSW tax revenue, away from NSW.3 At the margin, that would give substantial scope for tax reform in NSW. The debate in the lead-up to the 2007 Federal election has seen the distribution of GST revenues under HFE and the division of fiscal spending responsibilities, particularly as they relate to hospitals, discussed as areas where change might be contemplated.

1 Warren (2006), pp xix 2 Warren (2006), pp xxxii 3 Warren (2006), pp 28, Table 2. Estimate per capita factored up by population. Estimates of Revenue

from ABS 5506.0



The taxation mix Warren (2006) argued that there should be three criteria for judging the efficacy of the Commonwealth-State tax (and spending) mix:4 1. Tax assignment should follow expenditure. That is, capacity to raise tax revenue should

correspond with spending. In the ideal world, the States should not be reliant on any transfers from the Commonwealth.

2. Economic efficiency of tax assignment. That is, the States should have access to

efficient taxes. (This criteria is discussed in Matter 2 below) 3. Fiscal need: tax revenues should have scope to grow with expenditure. That is, the tax

base of the States should be aligned with growth in the economy and demand for services, or the States should have the power to amend the rates of taxation applying to that tax base. With little discretion on rates, eg GST, revenue cannot necessarily match expenditure.

In terms of those criteria, the first and third criteria are crucial to the NSW Government’s ability to forward plan the delivery of public services. The high vertical fiscal imbalance (VFI) in Australia implies that the first criterion is not met. For NSW, the position is only marginally different to that of the other States. As outlined in Figure 1 below, NSW’s dependence on payments from the Commonwealth has notionally increased since 1999/00, with Commonwealth payments rising from 31.6% of NSW total revenues to 42.7% in 2005/06, while its own tax revenues have declined from 47.8% to 36.2% over the same period. On these measures, the other States are more dependent on the Commonwealth courtesy of the Commonwealth Grants Commission (CGC) allocating higher shares to the smaller states5.

Commonwealth 31.6%

Interest income 1.5%

Sales of g&s 8.6%

Other 10.5%

Tax revenue 47.8%

2005/061999/00

Figure 1: NSW Revenue Sources

GST24%

Other Commonwealth

18% Sales of g&s

8%

Interest income

3%

Other 11%

Tax revenue

36%

In theory the GST is passed to the States by the Commonwealth and with that arrangement locked in place, it could be argued that the States are less dependent on the Commonwealth. That is, GST revenues account for over half of the Commonwealth payments, leaving NSW dependent on discretionary Commonwealth payments (predominantly Specific Purpose Payments) for just 18.3% of its revenues.

4 Warren (2006), pp xiii 5 Perversely, NSW taxpayers are paying a price for the illusion of being less dependent on the

Commonwealth.



However, while the GST revenues comprise the bulk of Commonwealth payments, these discretionary payments from the Commonwealth are still very critical at the margin to the States balancing their books in any year. That gives an element of uncertainty for ability to forward plan the delivery of public services. In terms of the third criteria, the GST has the important and positive characteristic that it is a growth tax with its base – private consumption – likely to grow broadly in line with growth of the economy and provide commensurate increased revenue to the States. There will be some cyclicality in consumption spending (hence in GST revenues) but less so than will be the case with personal and company tax revenues. It could be argued that the GST has given the States’ revenue base an increased degree of predictability. However, from a medium to long-term perspective, the States are responsible for some areas of spending such as hospitals for which demand is expected to grow faster than average consumption (the GST base). The IPART Issues Paper refers at p14 to service delivery costs rising at a rate greater than inflation creating a ‘funding gap’. In the post-GST era, there have been some significant changes in the tax mix, as highlighted in Figure 2.

NSW Taxes as % of Revenue

Figure 2: NSW Taxation Sources

11.8 11.9

2.8 4.47.6

8.54.9 3.54.6 4.26.3

0

9.6

5.4

0

510152025

3035404550

1999-00 2006-07

OtherFranchiseMotor vehicleGamblingConveyanceLand taxPayroll

Significant components of the State taxation base have been lost with the complete loss of franchise taxes (related to sale of goods) and the financial transaction taxes (FID). In 1999/00 the franchise taxes accounted for equivalent of 6.3% of total NSW revenues and the financial transaction taxes accounted (included in the ‘other’ item in Figure 2) for almost 3%. Gambling taxation has declined in terms of its take, from equivalent to 4.9% of total NSW revenues in 1999/00 to 3.5% in 2006/07. Payroll tax has remained relatively steady at just under 12% of total NSW revenues and remains the most significant single source of NSW own taxation. The two sources of tax which have grown both relate to property: property conveyances and land tax. Property conveyance charges are heavily dependent on the property cycle and, given the volatility of these revenues, it is best to judge in terms of period averages. In the first half of the 2000s conveyancing revenues have averaged 8.6% of NSW revenue. In 2005/06, they accounted for 7.4% but in the intervening years, conveyancing revenues peaked at 9.9% in 2003/04. For 2006/07, they had recovered to 8.5% and for 2007/08 they were projected to be just over 8%. To put the 2000s in perspective, in the 1990s, conveyancing accounted for 5% of NSW revenues in the first half and 7% in the second half of the 1990s. In other words, relative to history and reflecting a relatively robust property market, this remains a high contribution to state revenues.



Land tax has shown the most significant growth, rising from 2.8% of NSW revenues in 1999/00 to 4.4% in 2006/07. While the property market is difficult to predict, the one certainty is its volatility which must impinge on the Government’s ability to plan forward. It is also problematic whether State finances can rely on the recent order of magnitude of conveyancing revenues in the long term. In a survey of NSW Business members conducted at the end of 2006, 56% considered it to be either extremely or very important to reduce the level of land tax on business premises.6 The fiscal position of NSW also faces pressure from the difficulties faced by local government. This relates back to Warren (2006)’s first criterion that tax assignment should follow expenditure, which does not occur in the case of local government in Australia or NSW. Allan’s (2005) report into the Financial Sustainability of Local Government in NSW has previously detailed the difficulties faced by local governments in NSW in managing community expectations within the constraints of the existing rate capping regime. To the extent that local governments are fiscally constrained the pressure points emerge elsewhere, that is, more directly on the State Government. It is perhaps pertinent to note that in NZ at the local government level, the revenue base is significantly larger than is the case with Australia. In NZ, the tax base of local government is equivalent to 2.1% of GDP, substantially larger than the 0.9% figure for local government in NSW and Australia (refer Table 1 below). In recent times there have been a number of inquiries exploring the financial sustainability of local government. These inquiries have indicated that there are structural inefficiencies which impede the capacity of local government to raise revenue, invest in capacity building infrastructure and provide the necessary level of funding for essential services.

In 2003 the House of Representatives Standing Committee on Economics, Finance and Public Administration conducted an Inquiry into Local Government and Cost Shifting. The final report ‘Rates and Taxes: A Fair Share for Responsible Local Government’ recommended a ‘major shake-up of Federal-State-local government relations’ and found that more functions are expected of local government, but there were insufficient funds to undertake them. The 2005 Independent Inquiry into the Financial Sustainability of NSW Local Government (Local Government Inquiry), commissioned by the Local Government and Shires Association (LGSA), found that local government funding is systemically unsustainable. In response to the inquiry’s report the LGSA identified major challenges including: an infrastructure funding crisis, cost-shifting and an inadequate revenue base. Also in 2005, Professor Maurice Daly’s report found that an urgent and widespread review was needed to examine the funding, functions and responsibilities of councils.

In May 2007 the Sydney Chamber of Commerce, part of NSW Business Chamber, released the report, Who’s Governing Sydney?, undertaken by Professor Ed Blakely in conjunction with the University of Sydney. The report found that Sydney’s governance structures lack the authority to shape the future direction of the city, thereby threatening global competitiveness. Additionally, the report found that Sydney’s fragmented governance structure – comprising 43 local councils – was impeding strategic planning and the effective delivery of essential services. The prevailing consensus of these significant reports is that the funding arrangements for NSW local governments is unsustainable and impede the capacity of local government to appropriately invest in essential infrastructure and services.

6 NSW Business Priorities 2007 Survey, NSW Business Chamber, November 2007



Division of fiscal responsibility Central to the tax issue, from a State perspective, is the division of responsibilities on the spending side which as discussed above has been raised as an issue in the 2007 Federal election campaign. The key issue here is the lack of clear definition in the division of responsibilities which has been a factor contributing to inefficiencies and poor policy. As the Commonwealth Treasury has noted7:

“Joint government involvement in the same functional areas raises significant challenges including complexity for the public, cost and blame-shifting, and possible duplication or gaps in service delivery.”

NSW Business Chamber’s report 2007 Australian Business Priorities: Fixing the Federation noted that while Australia is entering its 16 successive year of sustained economic growth there has been a failure by the Federal and State Governments to develop a better model of co-operative federalism, which is resulting in dysfunction, blame-shifting and negatively impacting on Australia’s capacity to achieve and grow.8 The prime example is health where the States account for about 55% of spending and the Commonwealth about 45%. In the division of responsibility, the States fund all spending on public hospitals while the Commonwealth via Medicare and subsidies to private health insurance, funds the bulk of health spending outside public hospitals – hence the States’ desire to push patients outside the public hospitals and vice versa. Hospitals and related facilities account for 24% of NSW outlays. Moreover, with hospital spending rising about 1% per annum faster than overall spending that share of spending on hospitals has been steadily rising and will continue to do so, perhaps even accelerating as the aging of the population becomes a bigger issue in the next decade or so. The 2007 election campaign has seen both the Coalition and Labor parties at the Federal level indicating preparedness to increase Federal involvement in the public hospital system. The Coalition Government initiated the take-over of the Mersey hospital in Tasmania, while the Labor Opposition foreshadowed a possible takeover of public hospitals if their performance did not improve.9 If this area of spending were to devolve to the Commonwealth, it would substantially reduce the spending base of NSW and hence the required revenue and tax base. That would of course have revenue implications for the Commonwealth which might be expected to see the Commonwealth claw back payments to the States – the Labor Opposition also foreshadowed such a reduction in payments to the States.10 However, such a fundamental revisit of Commonwealth-State fiscal arrangements would offer scope for a rethink in other areas, with the States able to press the case for the Commonwealth to do more to access its more efficient taxes. Regardless, with the States losing their fastest rising spending item, this would ease the long-term pressure on state finances. In turn that would allow the States to seriously look at tax reform. NSW Business Chamber has called for a Constitutional Convention in 2008 to identify ways of improving the performance of the Federation. Apart from the ACT election in October, there are no other elections, creating an ideal opportunity for a new framework for developing better services more efficiently.

7 Federal Treasury, Budget Papers 2005/06, 4-17 8 2007 Australian Business Priorities: Fixing the Federation, NSW Business Chamber, 2007 9 Statement by Labor leader, Kevin Rudd, Media Release, 23 August, 2007. 10 The Australian, Monday 27 August, 2007. Statement by the Labor leader, Kevin Rudd, on ALP health policy: “This will involve a parallel reduction in the commonwealth outlays to the states and territories from all sources for these hospitals. This includes the Australian Healthcare Agreement, specific purpose payments and other such funding payments.”



Matter 2: The efficiency of the taxes available to NSW and the Commonwealth.

Warren’s (2006) second criterion was that the States should have access to efficient taxes. This is probably the area of greatest State weakness. As indicated above, the Commonwealth has ownership of the three most significant and efficient tax bases – personal income, company profits and taxes on goods and services. Warren notes that, in theory at least, the most economically efficient state taxes are payroll and land taxes as both taxes have potentially broad bases. However, while theoretically efficient, “in practice their economic efficiency is reduced by concessions which narrow the tax bases. Interstate harmonisation of payroll bases could address some of these inefficiencies.”11 The issue of “efficiency” of the Australian tax system can be assessed by comparing it with New Zealand. NZ has the inherent advantage of having just two levels of government, removing the disparity between revenue and spending responsibilities. However, courtesy of NZ tax reform in the 1980s, NZ also has a tax system which compares very favourably with that of Australia. Table 1 and Figure 3 over compare the different taxes faced by taxpayers in Australia and NSW vis-a-vis NZ. The key difference is the significantly larger amount raised by its GST. The GST in NZ is applied at a 12.5% rate and has no exemptions for food. As a result it raises equivalent to 6.7% of GDP vs. 4.0% for Australia. Overall, income taxes, customs and excise and the GST (the Commonwealth taxes) raise equivalent to 30.7% of GDP for NZ in 2005/06, compared with 25.3% for Australia. The larger intake from the GST allows NZ to rely much less on the other less efficient taxes. Whereas in Australia, the States’ basket of taxes raise equivalent to 4.7% of GDP, in NZ this same tax basket only raises equivalent to 1.0% of GDP. It does not have a payroll tax, conveyancing taxes on property transfers, land tax and nor does it rely anywhere near as much on gambling taxes.

Taxes as % of GDP, 2005-06

Figure 3: NZ vs. Australian Tax

0

5

10

15

20

25

30

35

Australia NZ

Other Indirect TaxLand TaxStamp DutyMotor vehicleGamblingConveyancingPayrollCustoms & ExciseGSTOther Income Tax

Company taxIndividual Income Tax

In 2006 the NZ Government conducted a review of business taxation to address the potential to reduce the company tax rate to make NZ more competitive12. One option it considered was the adoption of a payroll tax to fund a reduction in the company tax rate. The Review considered and rejected that option, largely based on observation of the Australian experience. The report noted that, in terms of neutrality, payroll taxes were not levied on the self-employed: for good reason given the difficulty in measuring the labour component of the income of the self-employed. The report also noted that for employees, thresholds means that small firms are exempt. That has the benefit of reducing compliance costs but “provides

11 Warren (2006), pp 63. 12 NZ Inland Revenue (2006) Business Tax Review



a bias for labour to be employed by firms that are below the threshold rather than firms that are subject to the payroll tax. This is unlikely to promote labour productivity.”13 A further concern with a payroll tax was that “it would be levied disproportionately on sectors with a high labour cost. It is unclear whether such a switch would promote productivity and growth.” The review concluded that “a payroll tax, while having some attractions in principle, is much less attractive in practice.”14 Matter 3: The existing NSW tax system according to standard taxation

principles (that is, efficiency, equity, simplicity and transparency) as well as the interstate competitiveness of NSW taxes.

Efficiency

In the post-GST period, using the revenues generated from the GST, taxation reform has focussed on the abolition of stamp duties on transactions. The focus is now more squarely on payroll tax and land tax. Table 1 sets out the comparative qualities of the key state taxes. The GST is included despite it being contentious as to whether it is a Commonwealth or State tax, because for the reasons discussed above policy on the GST has a major bearing on the States’ reliance on less efficient taxes. As Warren (2006) has noted, the Commonwealth income taxes and the GST are the most efficient taxes. The modifications to the GST, which exempted food and some other items, mean that the Australian version of the GST is less efficient than the NZ version but it nonetheless ranks high in terms of efficiency. As discussed above in reference to NZ, in theory a payroll tax is an efficient tax and the NSW Treasury has argued this point. However, as the NZ Inland Revenue found, in practice as distinct from theory it is a relatively inefficient tax. That inefficiency relates to the exemption of the self-employed, compliance costs and related to that the exemption of small businesses by the use of thresholds. A land tax is also in theory a relatively efficient tax but with the exemption of large numbers of land-owners, the distortions to land usage that causes makes it less efficient in practice. As between payroll tax and land tax, the Victorian Business Tax Review Committee (2005) argued that (a reformed) land tax was a more efficient tax: “this is because land, unlike capital, is not mobile and the supply of land is fixed. A tax on the unimproved value of land does not change the demand for land or its use.”

Table 1: Efficiency of the Major State taxes Efficiency -

theory Efficiency- practice

Equity Transparency

Simplicity

GST 1 1 2 1 2 Payroll Tax 1 3 2 3 2 Land Taxes 1 2 2 2 2

Notes to Table: 1 = High, 3 =Low

In terms of transparency to the public, the GST is the most transparent in that the GST component is explicitly included on many receipts and bills for gods and services. By contrast, payroll and land tax are less public although of the two land tax tends to be more transparent than payroll tax hence the political attraction of payroll tax. However, payroll tax is not transparent to NSW Business Chamber members. In the 2007 survey of members’ business priorities15, payroll tax was ranked first as their major tax concern (by 46% of

13 NZ Inland Revenue (2006) Business Tax Review, pp 26 14 NZ Inland Revenue (2006) Business Tax Review, pp 23 15 2007 Australian Business Priorities: Fixing the Federation, NSW Business Chamber (2007)



members), ahead of stamp duty (41%) and land tax (34%). Given that many small business members are exempt from the payroll tax, it is likely to have ranked even higher by those businesses bearing the tax. In terms of simplicity, all three taxes have some complexity and thereby impose a cost on business. Hence the attractiveness of the NZ tax system where they simply have fewer taxes. Equity is arguably contentious. Warren, Harding and Lloyd (2005) have argued that, looking at the period 1994/95-2001/02, by itself the introduction of the GST made the tax system more regressive but that overall “the progressivity of the Australian tax system and the distribution of post-tax income appears to have remained remarkably stable over this period.”16 Superficially, the GST might be argued to be less equitable vis-à-vis payroll tax and land tax because it is a tax paid by business. However, while paid by business, the cost is ultimately borne by NSW employees and consumers in terms of diminished employment prospects (lower competitiveness of NSW business) and higher prices. Competitiveness NSW is facing increased competitive pressure from the other States in attracting business and employment opportunities to the State. That competitive pressure is reflected in the flow of people out of NSW. There are many factors contributing to that position, some such as the high $A and mining boom being the product of external forces, but regardless it only enhances the need for NSW to have a competitive tax position. NSW has the highest State payroll tax rate in Australia at 6.0%, compared with 5.05% in Victoria and 4.75% in Queensland – these being the two key competitors for NSW. The CGC comparison of the revenue raising effort of the States (Table 2) indicates that, on an equivalent basis, NSW payroll tax has averaged 9% higher than in Victoria in the period 2000-01 to 2005-06, and 10.5% in 2005-06. Compared with Queensland, the payroll tax rate is about 25% higher.

Table 2: Commonwealth Grants Commission: Assessed revenue raising effort ratio* Payroll tax NSW Victoria Qld 2000-01 110.76 97.6 77.6 2001-02 104.15 100.1 85.44 2002-03 104.35 99.49 85.8 2003-04 105.99 95.7 85.91 2004-05 106.57 96.89 86.18 2005-06 106.8 96.7 86.07 Average 106.44 97.75 84.5 * Effort ratio is ratio of a state's actual revenue per capita to its assessed revenue: the

latter is revenue it taxed at average tax rates. A ratio greater than 1 indicates that a State is imposing higher than average tax rates.

Source: CGC (2007)

Combined with other state taxes, payroll tax contributes to higher costs in NSW. The comparative burden of these taxes in NSW can be measured in terms of taxes per capita, and this is shown in Figures 4 and 5.

16Warren, Harding and Lloyd (2005), pp 114



Taxes per capita, 2005-06

Figure 4: Taxes Per Capita

$2,305$1,986

$1,691 $1,900 $1,916$1,407

$589$648

$611

$1,268

$434

$385

0

500

1000

1500

2000

2500

3000

3500

NSW Vic QLD WA SA TAS

Conveyance dutyper capita

All tax exconveyance dutyper capita

Figure 4 shows that NSW is the highest taxing State bar WA in 2005/06. In the case of WA that wholly reflects the extreme magnitude of the property boom in that state in driving conveyancing revenues, whereas property turnover was at a low point for NSW in 2005/06. Excluding this volatile component, taxes per capita are 16% higher than in Victoria, 36% higher than in Queensland and 21% higher than in WA. The overall heavier reliance of NSW on its own tax revenue is illustrated in Figure 5. Own tax revenues account for 36% of NSW revenue compared with 29% for the other States in aggregate.

GST25.4%

Tax revenue 28.7%

Sales of g&s 9.5%

Interest income

4.3%

Other Commonwealth 20.1%

Other 12.0%

NSWOther States

Figure 5: Revenue Sources: NSW vs. Other States 2005-06

GST24.4%

Tax revenue

36.2%

Sales of g&s 7.7%

Interest income

2.9%Other 10.5%

Other Commonwealth 18.3%

The difference between NSW and the other States is almost wholly explained by higher business taxes (refer Figure 6). Payroll tax per capita is 17% higher than in Victoria and land tax per capita is 65% higher. Relative to Queensland, the position is more extreme at 57% and 148% respectively. The CGC estimation in Table 2 indicates that NSW “over utilises” payroll tax compared with the other states but this point could also be made with respect to all business taxes. Non-business taxes (ex-conveyancing) are more comparable, but NSW is still marginally higher than Victoria (by 6%), Queensland (9%) and WA (19%).



Taxes per capita, 2005-06

Figure 6: Business Taxes Per Capita

$940$801

$597$826

$625 $545

$312

$189

$126

$191

$230$125

0

200

400

600

800

1000

1200

1400

NSW Vic QLD WA SA TAS

Land tax percapita

Payroll tax percapita

The point here is that, to the extent there is a cross-subsidy from NSW taxpayers to the other States, there is effectively a (larger) cross-subsidy from NSW businesses to businesses in the other States. That cross-subsidy is at a cost to the competitiveness of business in NSW. The contribution of higher payroll and land taxes to making NSW business uncompetitive can also be illustrated by some examples of costs for comparable firms in NSW vis-à-vis the other big states. These comparisons are shown in Table 3 below. In the case of firms with 12 employees, for example, the payroll tax costs are about 10% higher in NSW than in Victoria and 2.4 times larger than in WA. Moreover, in its 2006/07 Budget, the Victorian Government announced a two year plan to cut its payroll tax rate to 5.0% which will only aggravate the position vis-à-vis Victoria. The Queensland competitor would have no payroll tax liability courtesy of a Queensland Government decision in its 2006/07 Budget to lift the threshold to $1 million. With vehicle costs, parking levy and land tax added in, the position deteriorates further vis-à-vis Victoria, with the NSW business facing tax costs 34% higher than in Victoria, ten times higher than in Queensland and almost three times higher than in WA. For a business with 18 employees, NSW payroll and total tax costs are 18% and 35% respectively higher than in Victoria. For a Queensland firm, the payroll tax obligation for firm with 18 employees is one sixth of that of its NSW competitor. Overall tax costs for a NSW firm are almost five times higher than in Queensland.

Table 3: Inter-State Comparison of Tax Costs to Business State AWE Total

Payroll Threshold Payroll

Tax Base Payroll Tax Rate

Payroll Liability

Parking Levy

Vehicle Taxes

Land tax Total

Scenario A: Small Business with 12 Employees NSW $1,189 $808,438 $600,000 $208,438 0.060 $12,506 $3,680 $3.034 $6,369 $25,589 Victoria $1,141 $77,131 $550,000 $226,131 0.0505 $11,420 $3,200 $3,618 $850 $19,087 Qld $1,086 $738,722 $1,000,000 $ - 0.048 $ - $ - $1,884 $675 $2,559 WA $1,242 $844,691 $750,000 $94,691 0.055 $5,208 $782 $2,602 $563 $9,155

Scenario B: Small Business with 18 Employees NSW $1,189 $1,212,657 $600,000 $612,657 0.060 $36,759 $5,521 $4,551 $11,469 $58,299 Victoria $1,141 $1,164,196 $550,000 $614,196 0.0505 $31,017 $4,800 $5,426 $1,943 $43,186 Qld $1,086 $1,108,083 $1,000,000 $144,110 0.048 $6,845 $ - $2,827 $2,268 $11,939 WA $1,242 $1,267,036 $750,000 $517,036 0.055 $28,437 $1,173 $3,903 $904 $34,417 Notes on Scenario A

Small business of 12 employees, each earning average wages as per ABS measure of average weekly earnings for full-time employees. The wages bill includes the superannuation levy but excludes fringe benefits and other inclusions. The business owns two cars (one compact, one large) and two commercial vehicles (one utility, one van), on which it pays annual registration fees and stamp duty on initial registration which is amortised over four years. It has four parking spaces and operates in CBD/North Sydney or equivalent in other capitals. The business operates on premises with unimproved value of $750,000 in Sydney, and lesser value (70% of Sydney value) in the other capitals.

Notes on Scenario B As per Scenario A, but small business of 18 employees, with six vehicles and parking spaces, and property with value of $1.125million.



Matter 4: Options to improve the efficiency, equity, interstate competitiveness, simplicity and transparency of NSW tax system, given the taxes available to it.

The other side of the coin to taxation is government spending. To the extent that Government expenditure performance and efficiency fall short of appropriate benchmarks, there is increased pressure on the taxation base. A review of the performance of the NSW Government by the NSW Business Chamber in 2006 (Kickstart NSW) identified expenditure cuts of $0.4bn per annum, improved cost recovery measures of $0.2bn per annum which would be available to finance cuts in business taxes. The recommended savings were based on Productivity Commission reports on government services and CGC data which provide a comprehensive comparison of the relative performance of government services across the States and Territories. The Review also identified efficiency savings of about $0.6bn per annum but assumed those savings would be used to increase the levels of service. While the NSW Government identified efficiencies in the 2007/08 Budget, only two of the recommendations included in this report were actioned. NSW Business Chamber considers that action on these recommendations would provide opportunity for further expenditure savings to be available to offset cuts to business taxes in NSW. The Commonwealth Grants Commission (2007) has also highlighted that NSW is less efficient in its provision of services. That is despite have higher potential revenue base and higher tax rates – and allowing for the CGC redistributing revenues away from NSW – NSW provides a below average level of services. Implicitly, given that the CGC allows for higher wage costs, the CGC is supporting the Productivity Commission’s assessment that NSW performance falls short. Recommendations

1. To reduce the extent to which NSW businesses effectively subsidise other states

which reasonable observers would consider otherwise capable of providing adequate services, the NSW Government should continue its efforts to pursue reform of the Commonwealth Grants Commission system for distributing GST revenues to the States.

2. To improve accountability and efficiency in raising, distributing and spending taxation

revenue, the NSW Government should promote and participate in a 2008 Constitutional Convention on Commonwealth-State relations which would:

a. determine between the States and Commonwealth responsibility for the delivery of services by a single level of government, and

b. consider, in particular, transferring health to one level of government or the other. The NSW Business Chamber supports Federal leadership on this issue as it cannot be addressed on a State-by-State basis.

3. To make NSW more competitive given that Victorian and Queensland tax rates are

lower, and unlike NSW, have been reduced in recent years, the NSW Government should undertake a three year program to cut the payroll tax rate to 5.25% and lift the threshold to $700,000. The Government should be aware that the tendency, politically attractive though it may be, to shift the tax burden from households to business is not costless.

4. To further improve NSW competitiveness given that land tax also contributes to the

cost of business, the NSW Government should also look to progressively reduce the land tax rate.

5. To ensure community support for measures aimed at reducing congestion and

greenhouse gas emissions the NSW Government should review the benefit and



impact of the parking space levy and if maintained, require a clear link between revenues raised and public transport improvements.

6. To finance the proposed cuts in business taxes the NSW Government should act on

the recommended expenditure reductions and efficiency improvements in NSW Business Chamber’s Kickstart NSW Report. It is implicit in these recommendations – which are aimed at improving NSW competitiveness – that existing tax rates should not be increased nor new taxes created

Sources for Figures

Figure 1: NSW Revenue Sources ABS (2007) Taxation Revenue 2005-06 ABS Cat 5506.0, May, 2007

Figure 2: NSW Taxation Sources NSW Budget Statements, Chapter 3: General Government Sector Revenues

Figure 3: NZ vs. Australian Tax ABS (2007) Taxation Revenue 2005-06 ABS Cat 5506.0, May, 2007 ABS National Accounts Cat 5206.0 New Zealand Treasury, Budget Papers, 2007 Taxation Statistics Statistics NZ, National Accounts

Figure 4: Taxes per Capita ABS (2007) Taxation Revenue 2005-06 ABS Cat 5506.0, May, 2007 ABS Population by Age and Sex, Australia, 2006 Cat 3235.0

Figure 5: Revenue Sources: NSW vs. Other States ABS (2007) Taxation Revenue 2005-06 ABS Cat 5506.0, May, 2007

Figure 6: Business Taxes per Capita As per Figure 4

References

ABS (2007) Taxation Revenue 2005-06 ABS Cat 5506.0, May, 2007

ABS (2007) Government Finance statistics 2005-06 ABS Cat 5512.0, April, 2007

Allan, P (2005) Independent Inquiry into the Financial Sustainability of Local Government in NSW, NSW Local Government and Shires Association

Commonwealth Grants Commission (2007), Relative Fiscal Capacities of the States

IPART (2007), Review of State Taxation Independent Pricing and Regulatory Tribunal Issues Paper, October, 2007

NSW Business Chamber (2006), Kickstart NSW: submission to the Audit of Government Expenditure

NSW Treasury (1999), The Case for Payroll Tax NSW Treasury Office of Financial Management Research and Information Paper, September, 1999

NSW Treasury (2005), Interstate Comparison of Taxes 2005-2006 NSW Treasury Office of Financial Management Research and Information Paper, October, 2005

NSW Budget Statements, various years

NZ Inland Revenue Department Business Tax Review: a discussion document Wellington, July 2006

Victorian State Tax Review Committee (2001), Review of State Business Taxes Department of Treasury and Finance, Melbourne, February, 2001.

Warren, N (2006), Benchmarking Australia’s Intergovernmental Fiscal Arrangements. Final Report NSW Treasury, Sydney.

Warren, N., Harding, A. and Lloyd R. (2005), GST and the changing incidence of Australian taxes: 1994-95 to 2001-02, eJournal of Tax Research, 3(1): 114-145

Australian Business Limited Kickstart NSW

Kickstart NSWThe Australian Business Limited submission to the Audit of Government Expenditure

2

1. Executive Summary 42. Economic Overview 63. Fiscal overview 7 Expenditure

Taxation

Budget Position

4. Objectives of Kickstart NSW 85. Methodology 86. Expenditure Cuts 9

Premier, Treasurer and Minister for Citizenship 9 Premier’s Department

Cabinet Offi ce

The Legislature

Community Relations Commission

Natural Resources Commission

Offi ce of Women

Minister for Transport and Minister for State Development 11 Department of Transport

Department of State & Regional Development

Special Minister of State, Minister for Commerce, Minister for Industrial Relations, Minister for Ageing, Minister for Disability Services and Assistant Treasurer 11

Offi ce of Industrial Relations

Attorney General, Minister for the Environment and Minister for the Arts 11

Attorney General’s Department

Department of Environment and Conservation

NSW Film and Television Offi ce

Minister for Education and Training 13

Department of Education and Training

Minister for Planning, Minister for Redfern Waterloo, Minister for Science and Medical Research, and Minister Assisting the Minister for Health 13

Ministry for Science and Medical Research

Minister for Community Services and Minister for Youth 14 Commission for Children and Young People

Minister for Tourism and Sport and Recreation, Minister for Women, and Minister Assisting the Minister for State Development 14

Department of Sport and Recreation


3

Minister for Natural Resources, Minister for Primary Industries, and Minister for Mineral Resources 14

Department of Agriculture

Minister for Justice, Minister for Juvenile Justice, Minister for Emergency Services, Minister for Lands and Minister for Rural Affairs 15

Department of Corrective Services

Minister for Roads 15 Roads and Traffic Authority

7. Efficiency Savings

Special Minister of State, Minister for Commerce, Minister for Industrial Relations, Minister for Ageing, Minister for Disability Services and Assistant Treasurer 16

Department of Ageing, Disability and HomeCare

Minister for Education and Training 16 Department of Education and Training

Minister for Community Services and Minister for Youth 17 Department of Community Services

Minister for Roads 17

Roads and Traffic Authority

Minister for Housing and Assistant Health Minister 18 Department of Housing

8. Cost Recovery Measures

Premier, Treasurer and Minister for Citizenship 18 Treasury

Minister for Police and Minister for Utilities 18 Sydney Water

Minister for Education and Training 18 Department of Education and Training

Minister for Health 19 NSW Health

9. Asset Sales 19

Snowy Hydro Limited

Sydney Olympic Park Authority

10. Reducing Payroll Tax 20

4

1. Executive Summary

The NSW economy needs a kickstart. After a decade of rising employment, Budget surpluses and strong economic growth, the economy of NSW has started to falter.

The NSW Budget is moving into defi cit, the NSW economy is contracting and NSW has become a dead weight on national economic growth. NSW has the highest unemployment rate on mainland Australia with an unemployment rate of 5.5% compared to the national average of 5.1%1. It is no coincidence that NSW has the most onerous employment taxes and charges in Australia2.

The NSW Government Expenditure Review, initiated by the Premier and Treasurer, is key to bringing the Budget back into balance, preserving NSW’s Triple A credit rating and cutting employment taxes.

Australian Business Limited called for a review of Government expenditure when it released its Mid Term Report Card in March 2005. The instigation of the Audit of Government is welcomed and supported by business.

NSW Government expenditure has grown too fast. Since 2002/03 NSW Government expenditure has grown by $6.3 billion or 18.4%3. Most of this growth has not been budgeted by NSW Treasury who have under-estimated expenditure by an average of 17.1% since

2002/034. If the 2008/09 Forward Estimates are underestimated by a similar level it would mean an additional $7.7 billion in unbudgeted expenditure in 2008/09.

Australian Business Limited has brought together a team of consultants, former public servants and economists to assess the expenditure performance and effi ciency of the NSW Government. The result of that work is Kickstart NSW.

The Kickstart NSW plan will over the next three years

• reduce expenditure by $1.4 billion • improve cost recovery of Government

service by $500 million • provide an additional investment of $1.6

billion in better services created through effi ciency gains

• reduce employment taxes in NSW to those of neighbouring states – cutting Payroll Tax to 5.25% by 2008/09

• return the NSW Budget to balance• preserve NSW’s Triple A credit rating.

The NSW Government is committed to spending more than $131 billion5 over the next three years. The initiatives outlined in Kickstart NSW equate to 3.2% of total Government expenditure by 2007/08. These improvements are realistic and provide the foundation by which we can Kickstart NSW.

Kickstart NSW Financial Overview

2005-2006 $ million

2006-2007 $ million

2007-2008 $ million

2008-2009 $ million

Forward Estimates 2006-07 to 2008-09 (Half Yearly Review)

$21 ($533) $69 $813

Proposed expenditure cuts $0 $255 $412 $443

Proposed savings from asset sales $0 $0 $152 $153

Improved cost recovery measures $0 $212 $216 $220

Payroll Tax cuts $0 ($232) ($491) ($783)

Revised Budget Result $21 ($298) $358 $846

Effi ciency savings in service delivery areas $0 $398 $601 $616

Budget outcome (incorporating effi ciency savings) $21 $102 $958 $1,461

Expenditure cuts as a % of Total Government Expenses 0.0% 0.6% 0.9% 1.0%

Total improvements as a % of Total Government Expenses 0.0% 2.0% 3.2% 3.2%

5


Expenditure Cuts

2006-07 $ million

2007-08 $ million

2008-09 $ million

Premier’s Department - reverse growth in expenditure $8.3 $19.4 $19.9

Cabinet Office - reverse growth in expenditure $1.1 $3.3 $3.3

Abolish Public Service Unattached List $- $17.9 $18.3

Legislature - privatise Parliamentary dining rooms and reduce staffing $- $0.8 $0.8

Community Relations Commission - abolish and contract out translation services $3.7 $8.4 $8.6

Natural Resources Commission - abolish Commission and move function to the Department of Environment and Conservation

$2.8 $4.5 $4.6

Office of Women - abolish $1.0 $2.4 $2.4

Department of Transport - cut administration $- $2.9 $3.0

Department of State and Regional Development - efficiency dividend $7.9 $8.1 $8.3

Office of Industrial Relations and Attorney General’s Department - savings from referring NSW Industrial Relations powers to Australian Government

$5.1 $28.8 $29.5

Attorney General’s Department - reduce Court administration costs $13.6 $27.9 $28.6

Privacy Commission - abolish Commission and transfer responsibilities to Ombudsman $0.4 $1.0 $1.1

Department of Environment and Conservation - reverse expenditure growth $5.6 $15.2 $15.6

NSW Film and Television Office - abolish $7.6 $9.9 $10.1

Department of Education and Training - abolish back to school allowance $56.0 $56.0 $56.0

Department of Education and Training - halt the final stage of K-2 class size reduction program pending full evaluation of benefits

$9.6 $19.2 $19.2

Ministry for Science and Medical Research - move grants programs to NSW Health and Department of State and Regional Development and accept Federal Government priorities for medical research

$0.9 $3.4 $3.4

Commission for Children and Young People - transfer essential functions to DoCs and Ombudsman and eliminate remaining functions

$3.3 $6.6 $6.7

Department of Sport and Recreation - increased returns from programs $18.5 $18.9 $19.4

Department of Agriculture - increase return on R&D investments $13.0 $26.6 $45.4

Corrective Services - Improve efficiency from NSW prisons $8.1 $36.0 $36.9

Roads and Traffic Authority - abolish M4/M5 Cashback Scheme $88.8 $95.0 $101.7

Total Expenditure Cuts $255.3 $412.0 $442.8

Savings from asset salesSydney Olympic Park Authority (excluding open spaces and parklands)

$- $152.0 $152.9

Savings from Asset Sales $- $152.0 $152.9

Treasury - abolish land tax concessions for employer associations and trade unions $2.1 $2.1 $2.2

Department of Education and Training - establish school transport co-payment $48.1 $48.1 $48.1

NSW Health - increase collection of fees (private patient fees) $124.1 $127.2 $130.4

Sydney Water - reduce water concessions $37.5 $38.4 $39.4

Total Cost Recovery Measures $211.8 $215.9 $220.1

Department of Ageing, Disability and HomeCare - reduce administration costs and increase efficiency of services

$81.7 $121.4 $124.5

TAFE - increase efficiency $- $58.8 $60.2

Department of Community Services - reform mandatory reporting regime and investigation procedures for Child Protection and Out of Home Care

$45.9 $63.4 $65.0

Department of Housing - Adjust user charges $77.6 $81.5 $83.6

Roads and Traffic Authority - Increase efficiency of road maintenance $193.1 $275.5 $282.4

Total Efficiency Savings in Service Delivery Areas $398.3 $600.6 $615.6

6

2. Economic Overview

NSW is the slowest growing State in Australia6. Australian Bureau of Statistics data reveals that NSW is the only state with Gross State Product growth below the national Gross Domestic Product growth. NSW is also experiencing growth in Final Demand 1.2 percentage points below the Australian average growth rate7.

State Comparison of Final Demand June 2004 – June 2005

Source: ABS Australian National Accounts: State Accounts (5220.0) Nov 2005

State Comparison of Gross State Product 2004-2005

Source: ABS Australian National Accounts: State Accounts (5220.0) Nov 2005

NSW has the highest unemployment rate on mainland Australia. Over the past twelve months, 75% of all new full time jobs were created outside NSW. The growth rate for employment for NSW in 2005 was 1.4%, the second lowest of any Australian state. The NSW unemployment rate stands at 5.5% compared to the national average of 5.1%10.

According to Access Economics, NSW “is on the wrong side of a housing bubble, the wrong side of an overvalued $A, and the wrong side of an historic swing in the nation’s competitive advantage”11. Access argues that NSW is now an “anchor” on the national economy rather than a “driver”.

In response to the slowing employment market, the Premier & Treasurer abolished the vendor duty, cut workers compensation premiums by 5% and ended the “Sydney is full” policy. Business has welcomed these policy initiatives.

However, there are some medium to long term measures that will need to be put in place if NSW is to recover its position as the leading State. Some of these decisions will be politically diffi cult but it is Australian Business Limited’s view that it is better to face these issues sooner rather than later.

0

1

2

3

4

5

6

7

8

TASQLDWANTVICACTNSWSA

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

TASQLDNTACTWASAVICNSW

Annual Growth

Aust

% Change 04/05

Aust

%

%


3. Fiscal overview

ExpenditureThe fiscal position of NSW has progressively deteriorated over the past three years. Expenditure has increased from $34,277 million at the start of this electoral cycle12 to a projected $40,596 million in 2005/06, representing an increase of 18.4%.

Over 59% of the growth in expenditure is due to increasing wage costs. Employee costs have risen 22.7% since 2002/03.

Treasury has consistently underestimated the growth in expenditure and employee expenses over the past five years. This is primarily because wage increases have been over and above CPI and have not been tied to productivity improvements. NSW Treasury has underestimated expenditure increases by an average of 17.1% for the years 2002/03 to 2005/06. If the 2008/09 forward estimates were underestimated by a similar level it would mean an additional $7.7 billion in unbudgeted expenditure in 2008/09.

The Premier & Treasurer announced in December 2005 that he intends to continue the 1% efficiency savings sought from Government Departments in 2007/08 and 2008/09 and this is welcome.

TaxationNSW is the highest taxed state in Australia13. NSW residents per capita pay more in taxes than any other Australian state. Total State taxation has increased by 13.2% or $4.2 billion since 2002/03.

State Comparison of Taxation Per Capita and GSP Growth

Sources: State Treasury Budget Estimates 2005/06 ABS Australian National Accounts: State Accounts (5220.0) Nov 2005

ABS Demographic Statistics (3101.0) Sept 2005

Significantly, payroll tax collections have accelerated above inflation with annual revenue up $1 billion a year over 2002/03.

With the decline of the property market, the NSW Government has become increasingly reliant on payroll tax. Payroll tax represented 29.1% of total taxation revenue in 2002/03 and is projected to rise to 33.3% of total taxation revenue in 2008/09.

0

500

1000

1500

2000

2500

NSWACTVICWASAQLDNTTAS0

1.0

2.0

3.0

4.0

0.5

1.5

2.5

3.5

4.5

2002/03 ($M)

2005/06 ($M)

Change since

2002/03 ($M)

Percentage increase on

2002/03

Stamp Duty – total Transfer Duties 3,677 3,187 -490 -13.3%

Other Stamp Duties 1,544 1,605 61 4%

Payroll Tax 4,123 5,147 1,024 24.8%

Land Tax 1,136 1,658 522 46.0%

Taxes on Motor vehicle Ownership and Operation

1,122 1,329 207 18.5%

Gambling and Betting 1,262 1,541 279 22.1%

Other Tax Revenues 1,290 1,337 47 3.6

7

%$

Revenue per person

GSP %

8

NSW is over-reliant on payroll tax revenue. Commonwealth Grants Commission data confi rms that NSW collects more payroll tax per capita than any Australian State.

It should be noted that the difference in payroll tax collections per capita account for a signifi cant proportion of the difference in overall levels of State taxation between NSW and all other States.

Payroll tax collections are projected to increase 22% over the next three years from $5.1 billion in 2005/06 to $6.3 billion in 2008/09. The NSW Government will collect an additional $2.28 billion in payroll tax collections over the next three years.

It is no coincidence that NSW has the highest employment taxes and charges and the lowest employment growth rate.

Budget PositionThe NSW Budget is heading into defi cit. The 2005-06 Half Yearly Review revealed a deterioration in the Budget position for 2006/07 of $1,014 million with the $481 million surplus revised to a $533 million Budget defi cit14.

Access Economics attributes this deterioration to a combination of cyclical and structural factors. The cyclical factors are the end of the property boom and fl atter property taxation and structural factors are the falling share of GST revenues and increasing recurrent expenditure15

Both sides of politics have publicly indicated that recurrent expenditure can be decreased by reducing public service numbers. Finance Minister Costa 16 and Opposition Leader Debnam 17 have indicated their belief that public service numbers can be reduced without impacting on service delivery.

4. Objectives of Kickstart NSW

The objectives of Kickstart NSW are to

• improve the economic performance of the NSW Government through effi ciency improvements and expenditure reductions,

• improve the competitive position of NSW businesses by reducing the reliance on employment taxes,

• bring the NSW Budget into a balanced position over the next three years; and

• preserve NSW’s Triple A credit rating.

5. Methodology

The NSW Government employs over 370,000 people18 and is forecast to cost taxpayers $131 billion during the next three fi nancial years19.

To assist in understanding the scope of the issues facing the NSW Public Sector, Australian Business Limited undertook extensive interviews with senior public servants, former public servants, Parliamentarians, economists and Government consultants. Input was also sought from the membership of Australian Business Limited and from Australian Business Limited’s affi liates, the Hunter Business Chamber and the Illawarra Business Chamber.

In assessing the performance of the NSW Government, reference was made to:

1. Identifying agency programs that

• need not be undertaken by Government at all,

• are better undertaken by the private sector or,

• areas of signifi cant overlap with other agencies (including the Australian Government).

2003/04 NSW Victoria QLD WA SA Tasmania

Payroll tax collections per capita($)

649 549 385 560 466 354

Comparison with NSW ($)

n/a -100 -265 -89 -183 -296

Source: Commonwealth grants Commission: State Own-Source revenue, per capita.2003-04

2003/04 NSW Victoria QLD WA SA Tasmania

State and local taxes per capita ($)

2,597 2,455 2,128 2,503 2,278 1,698

Comparison with NSW ($)

n/a -142 -469 -94 -319 -899

Source: Australian Bureau of Statistics 5506.0 2003/04

9


2. Winding back programs where there has been real growth in expenditure without a compelling economic or social rationale. 3. Demonstrated comparative inefficiency or ineffectiveness, with departmental and agency performance and expenditure benchmarked against comparable jurisdictions.

Benchmarks used to assess the relative efficiency of NSW Government spending have been derived from the Commonwealth Grants Commission Report on State Revenue Sharing Relativities 2005 Update and the Report on Government Services 2005 published by the Productivity Commission. These two publications and their constituent data are recognised as the most comprehensive comparison of state government spending and operations.

In its assessments of state government spending the Commonwealth Grants Commission determines a standardised assessment for more than fifty expense and revenue items. These standardised assessments make an allowance for factors which constitute sources of disadvantage and advantage for each state in implementing a consistent policy in each area across Australia. The specific factors of disadvantage for each assessment and their individual contribution to each standardised assessment have been the subject of ongoing and detailed negotiations between the states and the Commonwealth Grants Commission over a long period. Where NSW’s actual expenditure is significantly above the standardised assessment it is assumed that NSW could move to the expenditure equivalent to the standardised assessment without adverse consequences for NSW residents and businesses.

The Report on Government Services series published by the Productivity Commission is the most comprehensive assessment of the relative performance of government services and covers fourteen policy areas in significant detail. Where large discrepancies in the efficiency of NSW Government services are observed, compared with other similar states or the Australian average (whichever is higher) it has been assumed that NSW could eliminate 75% of the differential with no adverse consequences.

Redundancy estimates have been made using data from the NSW Public Sector Workforce Profile20, the NSW Voluntary Redundancy Policy21 and the 2005/06 Budget Papers. Where redundancies are required, the cost of those redundancies has been assigned to the 2006/07 financial year.

CPI growth of 2.5% is projected for expenditure in the years going forward from 2005/06 in keeping with NSW Treasury’s medium term projections in the 2005/06 Budget.

The scope of this project covers the General Government sector of the Budget and does not cover NSW Government Trading Enterprises.

6. Expenditure Cuts

Premier, Treasurer and Minister for Citizenship22

Agency: Premier’s Department

Action: Cut the 33% increase in total expenses for 2005/06 by half.

Rationale: The 2005/06 Budget papers project a 33% increase in total expenses for the Premier’s Department23. Departmental expenditure has grown by 67% since 2000/01. The Department must “lead by example” to ensure a culture of expenditure restraint takes hold across Government.

Budget Impact

2006/07 2007/08 2008/09$8.3 million $19.4 million $19.9 million

Agency: Premier’s Department24

Action: Abolish Public Service Unattached List

Rationale: The Unattached List is the list of public servants on full pay who have no duties. There can be no justification for this waste of taxpayer funds. The savings from abolishing the Unattached List will accrue across portfolios.

10

There is no reason why chief executives and SES offi cers should be maintained on the Unattached List. If they have been removed from their positions for non performance they should be removed from offi ce. The Public Sector Employment and Management Act makes provision for the termination of the employment of CEO’s and SES offi cers.

Budget Impact

2006/07 2007/08 2008/09Nil $17.9 million $18.3 million

Agency: Cabinet Offi ce

Action: Cut the 31% increase budgeted for 2005/06 in the Cabinet Offi ce by half.

Rationale: The increase in Cabinet Offi ce funding should be limited to providing only additional funding for Cabinet Offi ce work on greenhouse emissions. Cabinet Offi ce does not offer “front line services” and as such the projected funding increase of 31% cannot be justifi ed.

Budget Impact


Agency: The Legislature

Action: Privatise the Parliamentary Dining Room and reduce building and research services staff by 10%

Rationale: The provision of subsidised meals to four separate dining facilities and “room service” belongs to a bygone era. The Parliamentary catering facilities employ 39 full time equivalents (EFT) in a building where Parliament sits for only 50 days a year. The Federal Parliament has let the contract for its dining services to an external provider. The saving to the Budget from this measure is understated, as it makes no assessment of the market value of the rights to the dining rooms and staff canteens.

The 10% reduction to building and research staff equate to 10 Effective Full time Staff (EFT). It is believed the current staffi ng of close to 100 EFT, to run Parliament House and the Parliamentary Library, is excessive and can absorb a 10% cut.

Budget Impact2006/07 2007/08 2008/09Nil $0.8 million $0.8 million

Agency: Community Relations Commission

Action: Abolish Community Relations Commission (CRC) and transfer contract out the provision of Government translation services.

Rationale: The CRC cannot demonstrate how it has improved community relations in NSW. The policy work of the CRC primarily focuses on explaining community failure. It cannot demonstrate improved outcomes for any NSW citizens.

The CRC’s service of providing translation services to Government should be contracted out to the private sector.

Budget Impact


Agency: Natural Resources Commission

Action: Absorb function of Natural Resources Commission into Department of Environment and Conservation

Rationale: The role of the Natural Resources Commission can be fulfi lled within the Department. There is no need for a separate agency to provide “independent advice”. This agency represents a duplication of service.

Budget Impact


11


Agency: Office of Women

Action: Abolish the Office of Women

Rationale: There is no compelling rationale for this Office. Policy advice on areas such as employment, discrimination and disadvantage is better handled at a Department level. There is no evidence that the operation of the Office of Women has provided better policy outcomes for women in NSW.

Budget Impact


Minister for Transport and Minister for State Development

Agency: Department of Transport

Action: Reduce Department of Transport policy staff costs by 50%

Rationale: The Minister for Transport is already supported by over 185 contracting and regulatory staff. The policy unit is not a front line service of the Department and the reduction in the policy unit of 27.5 effective full time staff (EFT) will not alter Departmental service delivery.

Budget Impact


Agency: Department of State & Regional Development

Action: Efficiency saving of 8% in budgeted net cost of services

Rationale: Business accepts that “the pain” of expenditure cuts has to be shared. Some activities like the Country Embassy and the Trade and Investment Centre in Grosvenor Place appear to provide marginal benefit

for NSW businesses. The operation of offices in 24 separate locations also creates significant overhead for the Department and this can be rationalised.

The efficiency cut will eliminate “window dressing” and allow the Department to focus on its key role of attracting business to NSW.

Budget Impact

2006/07 2007/08 2008/09$7.9m $8.1m $8.3m

Special Minister of State, Minister for Commerce, Minister for Industrial Relations, Minister for Ageing, Minister for Disability Services and Assistant Treasurer

Agencies: Office of Industrial Relations and Attorney General’s Department

Action: Benchmark Industrial Relations costs to those of Victoria.

Rationale: The passage of Federal Government workplace relations legislation will move the majority of NSW workers under the State system into the Federal workplace relations system early in 2006. The work of the Office of Industrial Relations and the NSW Industrial Relations Commission will dramatically reduce and their costs should be reduced accordingly. It can be expected that costs could be benchmarked against the costs to run the Victorian system.

Budget Impact


Attorney General, Minister for the Environment and Minister for the Arts

Agency: Attorney General

Action: Reduce administration costs in Judicial Administration

12

Rationale: Signifi cant savings can be made in the NSW justice system. Productivity Commission data confi rms that the net recurrent cost per criminal fi nalisation in NSW Courts is 30% higher than Victoria and 34% higher than the national average.

The average cost of a criminal fi nalisation in NSW is $799, compared to $616 in Victoria and $393 in Queensland. The average cost for a criminal fi nalisation across Australia is $595. In 2003/04 there were 193,347 criminal fi nalisations in NSW.

The net recurrent expenditure per civil fi nalisation in NSW is also 25% higher than Victoria.

Given that the cost of criminal fi nalisations in NSW are 129% higher than civil fi nalisations and account for over 67% of all Court costs, reducing the cost of criminal fi nalisations is the key to reducing court administration costs.

The data for fi nalisations indicates there are signifi cant effi ciency gains that can be made within the NSW justice system. Actual NSW Government spending on court administration is 6% above Commonwealth Grants Commission standardised expenditure. In comparison Victoria is 14% below their standardised assessment. It is recommended that savings be found that reduce the difference between the criminal fi nalisation cost of NSW and Victoria by 75%. This equates to a saving of almost 11% of net recurrent exenditure on courts in NSW.

It should be noted that the net recurrent cost for fi nalisations excludes fi nes revenue, revenue from the NSW Offi ce of Debt Recovery and electronic courts in other states. Increases in court fees and fi nes will not change the administrative ineffi ciency of the NSW justice system. Most of the savings can be made by improving the effi ciency of criminal matters within local courts.

Budget Impact


Agency: Privacy NSW

Action: Abolish Privacy NSW

Rationale: Privacy NSW received 110 complaints in 2004/05 of which the Privacy Commissioner referred or could not act on 55 of those complaints . The average cost to the Government of a complaint to Privacy NSW is over $17,000. The NSW Privacy Commissioner has occupied the position on an “acting” basis for many years and the Government has been reluctant to formalise this arrangement. The current approach represents “death by a thousand cuts” and the NSW Government should move to fulfi l its intention and abolish the Commission. Complaints regarding NSW Government misuse of personal information should be handled by the Ombudsman.

Budget Impact


Agency: Department of Environment and Conservation

Program: Employee and other operating expenses to be cut by 4%

Rationale: Department of Environment and Conservation total expenses are budgeted to increase by 11.8% in 2005/06. The 4% cut to employee and operating expenses equates to only one quarter of the projected budget increase in the portfolio in 2005/06. This effi ciency dividend equates to 106 EFT in a Department with over 2,600 employees.

Budget Impact


13


Agency: NSW Film and Television Office

Action: Abolish the NSW Film and Television Office

Rationale: The NSW Government does not need to provide assistance to the film and television industry. There is no reason why the NSW film and television industry needs any more support than any other NSW industry. It is an unnecessary function not required by Government. Any residual activities of the Office could be handled by either the Department of State and Regional Development or the Ministry for the Arts.

Budget Impact

2006/07 2007/08 2008/09 $7.6 million $9.9 million $10.1 million Minister for Education and Training

Agency: Department of Education and Training

Action: Halt final roll out of K-2 class size reduction plan in 2007 until a performance assessment is undertaken.

Rationale: No evidence has been provided that the reduction of class sizes in years K – 2 has so far resulted in improved educational outcomes for NSW children.

The final stage of the class size reduction plan should be contingent on demonstrated proof that educational outcomes for K-2 have lifted to a point that can justify further additional investment. Budget Impact



Action: Abolish the Back to School Allowance for Primary, Secondary and Non-Government Schools

Rationale: There is no data to demonstrate that the $50 Back to School Allowance improves educational outcomes or the welfare of NSW families. The Allowance is not means tested and appears to incur significant administration costs.

Budget Impact

2006/07 2007/08 2008/09$56 million $56 million $56 million

Minister for Planning, Minister for Redfern Waterloo, Minister for Science and Medical Research, and Minister Assisting the Minister for Health

Agency: Ministry for Science and Medical Research

Action: Continue funding current Science and Medical Research grants and shift administration of grant program to Department of Health. Responsibility for encouraging the NSW bio-technology industry should be absorbed into the Department of State and Regional Development.

Rationale: This agency cuts across existing health and medical research priorities. The Federal Government has established the National Health and Medical Research Council (NHMRC) which determines and funds national priorities for medical research. The establishment of the NSW Department duplicates this Commonwealth priority.

The agency has undertaken work encouraging the growth of a bio-technology industry in NSW. While Government support of emerging industries is welcome, it does appear to replicate the functions of the Department of State and Regional Development.

14

Budget Impact


Minister for Community Services and Minister for Youth

Agency: Commission for Children and Young People

Action: Abolish Commission and transfer child protection functions to the Department of Community Services and the Ombudsman

Rationale: The Commission has two distinct functions – to be a policy advocate for young people within Government and to provide necessary employment screening checks on people working with young people.

The Commission’s fragmented approach to policy development has not provided taxpayers with value for money. For the most part it appears the Commission is trying to defi ne a policy role in an environment where it does not deliver any direct services to children or vulnerable children. It is recommended that complaints relating to the performance of NSW Government agencies (and organisations contracted by the NSW Government) relating to children should be handled by the NSW Ombudsman. The Ombudsman should receive 25% of the Commission’s Budget to fund this function ($2.2m in 2006/07, $2.2 million in 2007/08 and $2.3 million in 2008/09).

The Working with Children Check, the NSW Child Sex Offender Counsellor Accreditation Scheme and the Child Death Review Team are recognised by business as key social functions. These functions should be transferred to the Department of Community Services which is the agency responsible for child protection. The costs of these functions can be met from within the growing Community Services budget.

Budget Impact

2006/07 2007/08 2008/09$3.3 million $6.6million $6.7 million

Minister for Tourism and Sport and Recreation, and Minister for Women, and Minister Assisting the Minister for State Development

Agency: Department of Sport and Recreation

Action: Increase the level of cost recovery for sport and recreation services

Rationale: The net cost of sport and recreation development programs (excluding grants) is budgeted to be $36 million in 2005/06. The Department has over $200 million in land and buildings from which it should seek a greater return. It is recognised that sport and recreation does provide a community service and as such cost recovery should only be increased to cover 50% of the net cost of services.

Budget Impact


Minister for Natural Resources, Minister for Primary Industries, and Minister for Mineral Resources Agency: Department of Agriculture

Action: Progressively increase recovery of costs from Department of Agriculture research and development (to 15% in 2006/07, 30% in 2007/08 and 50% in 2008/09)

Rationale: The Department of Agriculture will invest $110 million in research and development in 2005/06 with the total unrecovered cost exceeding $84 million. According to the Department’s 2004/05 Annual Report its research and development has been providing an overall benefi t to cost ratio of 11.5:1. The excellent work of the Department is providing a clear commercial benefi t to primary producers. It is recommended that the Department of Agriculture actively identify ways to increase the cost recovery of its work.

15


Budget Impact

2006/07 2007/08 2008/09$13 million $26.6 million $45.4 million

Minister for Justice, Minister for Juvenile Justice, Minister for Emergency Services, Minister for Lands and Minister for Rural Affairs

Agency: Department of Corrective Services

Action: Reduce the average cost of imprisonment per day in NSW to comparable benchmarks in part through increasing privatisation levels within the NSW prison system.

Rationale: The costs for secure, open and periodic detention are more expensive in NSW than the Victorian and Australian standardised averages.

The cost of an open and periodic detention per prisoner day in NSW is $150 compared to $135 in Victoria and the Australian average of $143. The difference is greater for secure detention days where the cost is $182 in NSW compared to $162 in Victoria and the Australian average of $158. It can be argued that part of this difference is due to the different approaches of the NSW and Victorian Governments to privatisations of prisons with 8.7% of NSW prisoners in privately operated prisons compared to 40% in Victoria. Greater use of privatised prisons will create competitive pressures to assist in narrowing the cost gap between NSW and other jurisdictions.

Operating costs can be reduced to eliminate 75% of the gap between the NSW cost for secure detentions and the Victorian cost, and also 75% of the gap between the NSW cost and the Australian average in open and periodic detentions.

It has been noted that the recidivism rate in NSW is 22% higher than the national average25. The NSW prisoner recidivism rate was 44.7% in 2003/0426. Greater attention to reducing this differential can also be a significant driver in total cost reduction.

Budget Impact


Minister for Roads

Agency: Roads and Traffic Authority

Action: Abolish M4/M5 Cashback Scheme.

Rationale: The Cashback Scheme is becoming an increasing burden on taxpayers. Since 2002/03 the cost of the Scheme has increased 27% from $65 million to $83 million in 2005/06.

Further expenditure blowouts are expected in the Scheme following the opening of the M7 Westlink in December 2005. The M7 Westlink project will feed further vehicles onto the M4 and M5.

The Cashback Scheme is a political curiosity resulting from a misguided promise by then Opposition Leader Carr in the 1995 State Election. It is inconsistent with the approach taken by the State Government to other toll roads (eg Eastern Distributor, M7 Westlink, Sydney Harbour Tunnel and the Cross City Tunnel) and the approach taken with residents in other parts of Sydney. The policy is also at odds with the State Government desire to encourage greater use of public transport in Western and South Western Sydney.

Budget Impact

2006/07 2007/08 2008/09 $88.8 million $95.0 million $101.7 million

7. Efficiency Savings

Australian Business Limited has identified over $1.6 billion in efficiency savings in key welfare areas such as Community Services. Australian Business Limited does not advocate cutting expenditure on these services, rather that the benefits of the efficiency savings be re-invested in key welfare areas.

16

Special Minister of State, Minister for Commerce, Minister for Industrial Relations, Minister for Ageing, Minister for Disability Services and Assistant Treasurer

Agency: Department of Ageing, Disability and HomeCare

Action: Move service costs for disability services towards interstate benchmarks in part by reducing administration costs.

Rationale: Disability services per user are 21%

more expensive in NSW compared with Victoria and 39% more expensive than the Australian average. The total cost of Commonwealth State Territory Disability Agreement (CSTDA) services per user in NSW is $35,700 compared to the Victorian average of $29,500.

NSW also has higher administrative costs for disability services than Victoria. According to the Productivity Commission this difference equates to an additional 3% of the total cost of providing home care services.

This difference in administration cost represents a cost to NSW in excess of $27 million per annum.This saving reduces administration costs to the Victorian average and eliminates 75% of the gap between the NSW and Victorian user costs.

It is recommended the savings found be re-committed within the ageing, disability and home care sectors.

Effi ciency Reinvestment


Minister for Education and Minister for Training


Action: Opening up School Education and TAFE facilities to wider community usage.

Rationale: The Department of Education and Training controls over $15 billion in community assets (properties, buildings and sporting facilities).

These assets are under-utilised outside of school hours and by the wider community.

Evidence suggests that schools and TAFEs are currently not-equipped or encouraged to open up school premises to community groups for regular out of hours hire and usage. The development of guidelines that open up school premises to out of hours use by community groups will allow greater use of these valuable community assets. The guidelines should provide incentives to local schools to open up their facilities to the community by providing for the fi nancial benefi ts of community usage to stay with the school.


2006/07 2007/08 2008/09Nil Nil Nil


Action: Improve TAFE effi ciency and effectiveness by increasing TAFE teaching hours to levels comparable to similar institutions interstate, improve the utilisation of TAFE assets and seek an effi ciency dividend from TAFE.

Rationale: The NSW TAFE system is not as effi cient as interstate vocational education institutions. NSW spends 13.8% more than the Commonwealth Grants Commission standardised assessment for NSW, this difference equates to $207 million.

The Productivity Commission has also confi rmed this ineffi ciency with NSW recurrent expenditure per adjusted annual curriculum hour being 4% more than Queensland and 24% more than Victoria. NSW TAFE provided 98.3 million adjusted annual hours in 2003.

17


One of the key drivers of this inefficiency is the current award operating for TAFE teachers. The Government should negotiate a productivity agreement with TAFE teachers that increases teaching hours in exchange for a pay rise. The NSW award provides for a maximum of 686 teaching hours for TAFE teachers, this compares the maximum of 800 hours for Victorian TAFE teachers.

Similar to NSW School Education, TAFE should seek to gain greater community usage of its existing assets and in pursuing commercial activities. The Seaforth TAFE site, for example, has been vacant for six years, still without a comprehensive long term plan for the site. In total, savings equivalent to 5% of employee costs can be gained from these actions.

It is recommended that the gains from improved efficiency in TAFE be reinvested to provide increased funding for competitive tendering and user choice funding. Nothing should preclude TAFE from participating.

Efficiency Reinvestment


Minister for Community Services and Minister for Youth

Agency: Department of Community Services

Action: Reduce the differential between the NSW and Australian expenditure per child for child protection services and out-of-home services by 75%.

Rationale: Child protection and out of home care services per child cost 40% more in NSW compared to Victoria and are 25% higher than the Australian average.

It is clear the difference in cost is being driven by the mandatory reporting system introduced in NSW. The number of notifications in NSW has increased from 30,398 in 1999/00 to 115,541 in 2003/04. During this time notifications in NSW rose from 28.3% of all notifications in Australia to 52.7%.

In 2003/04, the NSW notification rate was 46.7 per 1000 children, compared to 25.6 in Victoria and 27.5 in Queensland.

In the June Quarter of 2005, 41,080 mandatory reports were made to the Department of Community Services making up 76.6% of all reports to the Department.

It also appears that the percentage of substantiated reports has fallen from 21.3% in 1999/2000 to 15.3% in 2002/0329.

It is clear that mandatory reporting is not working as intended and there is evidence that the number of reports hides real incidents of abuse. A reform of mandatory reporting is needed, such a reform will free up additional funds for service delivery in child protection and out-of-home services.

Efficiency Reinvestment


Minister for Roads

Agency: Roads and Traffic Authority

Action: Improve the efficiency of road spending by moving it to the Commonwealth Grants Commission standardised assessment through increased efficiencies from maintenance contracts and from labour force management.

Rationale: NSW actual road spending is 17% above the Commonwealth Grants Commission standardised assessment for NSW. After the cost of the M4/M5 Cashback is taken out (see earlier recommendation) this equates to $268.8 million in 2006/07.

This saving can be achieved in part through moving the 24% of staff on wages to salaried arrangements and increasing the proportion of maintenance contracted out on fixed price contracts. This targeted saving represents 11.4% of total RTA expenses for 2005/06 which is less than the budgeted expenditure growth from 2004/05 of 12.2%.

18



Minister for Housing and Assistant Health Minister

Agency: Department of Housing

Action: Increase housing user charges to the Commonwealth Grants Commission standardised assessment for NSW.

Rationale: Public housing tenants in NSW pay the lowest proportion of market rental for public housing tenants of any Australian state. All other Australian states collect more from their public housing tenants than does the NSW Government.

According to the Commonwealth Grants Commission, NSW in 2003/04 collected $77.6 million less than the standardised assessment for NSW. This change will lift public housing rents by an average of $11.90 per week and bring the tenant contribution in line with the contribution in other states. It should be noted that NSW has signifi cant public housing maintenance; and fi re and safety backlogs. In 2001 the Auditor General estimated the backlog was in excess of $1.1billion28. it is recommended that increased residential contributions be used to accelerate Government programs to reduce the backlogs.

Budget Impact


8. Cost recovery measures

Premier, Treasurer and Minister for Citizenship

Agency: Treasury

Action: Remove exemption for employer and employee organisations from land tax

Rationale: There is no compelling economic or social reason for this exemption of employer and employee organisations.

Budget Impact


Minister for Police, Minister for Utilities

Agency: Sydney Water

Action: Reduce Sydney Water Pensioner Concession by 50%

Rationale: The benefi t of pensioner concessions given to Sydney residents is higher than the concession given in regional NSW. Water shortages are impacting the Sydney catchment and there is a real need to change the pricing structure of water to refl ect its scarcity.

The change in the concession can be designed to ensure than low water users receive the benefi t from the Sydney Water pensioner concession.


Minister for Education and Training


Program: School Student Transport Scheme

Action: Co-payment of $2 per week for each student who uses the School Student Transport Scheme.

Rationale: The School Student Transport Scheme currently costs the NSW Government $498 million a year. This equates to an annual cost of $753 per child. The cost of the Scheme per child has increased by 10% in the last two years.

The co-payment of $2 per week or $80 per year represents approximately 10% of the cost of transporting a child. Australian Business Limited accepts there are alternatives to a fl at co-payment as a means of reducing the cost of the scheme. The proposal is derived from the best publicly available data.

19


The alternative available to Government is to seek co-payments linked to the actual cost of providing transportation to school students. Such a co-payment should recognise families experiencing hardship and seek to recover 10% of the total costs of the Scheme.

Budget Impact


Minister for Health

Agency: NSW Health

Action: Increase public hospital patient fee levels and eliminate the difference between NSW standardised assessment and actual revenue.

Rationale: NSW Health collects 31% less in public hospital patient fees than the Commonwealth Grant’s Commission’s standardised assessment. According to the Commonwealth Grants Commission, NSW collected $267 million in 2003/04 in public hospital patient fees compared to NSW standardised figure of $388 million. This compares with Victoria which collected $530 million in 2003/04 in comparison to Victoria’s standardised assessment of $271 million.

The difference of $121 million equates to an under-collection of $18.05 per capita.

The difference between the NSW and other jurisdictions can be attributed to the ease of which patients who are privately insured enter NSW hospitals as public patients. It is recommended that this funding gap be met through ensuring patients with private health insurance who use NSW hospitals do so as private patients.

Budget Impact


9. Asset Sales

Agency: Snowy Hydro Limited

Action: Proceed with sale

Rationale: Australian Business Limited notes its support for the sale of the NSW share of Snowy Hydro Limited. This decision is applauded by business. In a deregulated national market it will become increasingly difficult for NSW Government owned energy providers to compete against private providers. Inevitably this difference will have an impact on the balance sheet of NSW energy providers.

Business supports this sale and recommends that it be considered as the first step in a complete privatisation of electricity in NSW.

Budget Impact

Already a decision of Government and will be incorporated in the 2006/07 Budget papers.

Agency: Sydney Olympic Park Authority (SOPA)

Action: Privatise Authority assets with the exception of Bicentennial Park and its surrounds.

Rationale: The assets of Sydney Olympic Park should be developed by the private sector. Private sector ownership will drive the much needed development of the Olympic Park precincts.

Bicentennial Park and its surrounds are a significant community asset that should be kept in public hands. The cost of maintaining that asset has been modelled on the cost of running Centennial Park which has similar sized parklands. The value of the parklands and the cost of maintaining the parklands was deducted in calculating the benefit of privatising SOPA.

The budget impact reflects the dept repayments avoided by retiring dept with sale proceeds.

20

Budget Impact

2006/07 2007/08 2008/09Nil $152 million $152.9 million

10. Reducing Payroll Tax

Reducing employment on-costs is essential if NSW is to be competitive. NSW employers pay on average $2,628 per employee in payroll tax and workers compensation charges compared to $1,533 per employee in Queensland. The NSW payroll tax rate is 6.00% compared to 4.75% in Queensland.

State Comparison of Payroll Tax & Workers Compensation Premium Costs per employee

Source: Australian Business Limited Commissioned Research, ABS, May 2005 (Note data released prior to NSW 5% Workers

Compensation Cut and Victoria’s 10% cut)

The decision of the Premier & Treasurer to cut workers compensation premiums by 5% from 31 December 2005 is welcome by business as is his commitment to provide further workers compensation cuts as the performance of the Workers Compensation Scheme continues to improve.

However, the NSW Government is over-reliant on payroll tax and NSW businesses pay more in payroll tax than in any other Australian State.

Payroll Tax as a Percentage of Total State Revenue

Source: State Treasury Budget Estimates 2005-06

A NSW business with 20 full time employees will pay 175% more in payroll tax than a similar sized business in Queensland. Similarly a NSW business with 40 full time employees will pay 15% more in payroll tax (or $13,400) than a similar sized business in Victoria.

0 500 1000 1500 2000 2500 3000

NSW

VIC

SA

TAS

WA

QLD

Payroll TaxWorkers Compensation

25

26

27

28

29

30

31

32

QLDSAACTTASNTVICWANSW

$

21


Payroll Tax Comparison

Sources: State Treasury Budget Statements 2005-06ABS Average Weekly Earnings (6203.0) May 2005

The efficiency savings and expenditure cuts outlined in Kickstart NSW allows the NSW Government to cut the NSW payroll tax rate to 5.25% over three years. These cuts will reduce employment costs in NSW by $1.5 billion.

It should be noted that the cost of the cuts amounts to 66% of additional revenue projected to be collected by the NSW Government over the next three years. The expenditure cuts and efficiency savings already identified in Kickstart NSW ensure that the payroll tax cuts can be paid for at the same time as the Budget is brought into balance.

Kickstart NSW payroll tax cuts:

NSW($)

Victoria($)

QLD($)

SA($)

WA($)

Tas($)

ACT($)

15 Employees

15,419 14,843 0 13,872 5,451 0 0

20 Employees

32,559 29,416 11,869 27,735 21,018 0 0

25 Employees

49,699 43,989 28,294 41,599 36,585 11,980 20,095

30 Employees

66,838 58,561 44,720 55,463 52,152 26,698 41,239

40 Employees

101,118 87,707 77,571 83,191 83,286 56,135 83,527

Proposed Kickstart NSW rate

(%)

Cost of cut ($M)

Treasury projections

for payroll tax revenue increase

($M)

Increase in payroll tax

revenue after Kickstart NSW

cuts ($M)

2006/07 5.75 232 413 181

2007/08 5.5 491 749 258

2008/09 5.25 783 1117 334

Even after cutting the payroll tax rate to 5.25%, NSW payroll tax revenues are still projected to increase. The proposed cuts to the payroll tax rate account for $1.5 billion of the $2.3 billion projected increase in revenues.The payroll tax cuts proposed are affordable and bring the payroll tax rate in line with Victoria (5.25%) and close to Queensland (4.75%).

22

Footnotes 1 Australian Bureau of Statistics Cat No 6203 Jan 20062 Australian Bureau of Statistics Unpublished data -commissioned for Australian Business Limited May 2005

3 NSW Budget Papers 2003/04 (BP 1-15) and 2005-06 Half-Yearly Budget Review (pg 21)

4 Using 3 year forward estimates for the years 2002/03 to 2005/065 2005/06 Half yearly Budget Review (pg 17)6 ABS Australian National Accounts: State Accounts (5220.0) November 2005

7 Ibid8 ABS Labour Force (6202.0) October 20059 Australian Business Limited Media Release 10 November 200510 Australian Bureau of Statistics Cat No 6202 Jan 200611 Access Economics, State and Territory Budget Prospects

(September 2005)12 2004/05 Budget Papers table 1.2 Actual for 2002/0313 Australian Bureau of Statistics Cat No.5506.0 2003/0414 2005-06 Half Yearly Budget Review Pg 115 Access Economics Budget Monitor September 2005 (pg 12)16 Sydney Morning Herald 22 March 200517 Speech to NSW Liberal Party State Council 22 October 200518 ABS, Wage and Salary Earners - Public Sector, Cat No 6248.0.55.001

(Sept 05)19 2005-06 Half Yearly Budget Review pg 1720 Overview Report for the NSW public Sector Workforce Profi le 2004,

NSW Premier’s Department Public Employment Offi ce21 NSW Premier’s Department, Memos and Circulars M97-2722 For the purposes of Kickstart NSW Australian Business Limited uses

the portfolio allocation announced on 3 August 200523 Projected increase over the original 2004-05 Budget fi gure24 The benefi ts from abolishing the unattached list will accrue across

Government and Kickstart NSW attributes the benefi ts to the Premier’s Department.

25 Productivity Commission Report on Government Services 2005.26 NCOSS Strategic Plan 2004-2007.27 Productivity Commission Report on Government Services 200528 Note 2003/04 fi gures are not available due to the implementation of a

new information system in DoCS29 Auditor General Report 2001 “Maintenance of Public Housing”

estimates a maintenance backlog of $750 million and costs for fi re and safety upgrading of $350 million.

23


24

Tel: 13 26 96Fax: 1300 655 277

140 Arthur StreetNorth Sydney NSW 2060

Locked Bag 938North Sydney NSW 2059

Web: www.australianbusiness.com.au

nswbusinesschamber.com.au

Invigorating Business Representation

September 2007

2007 Australian Business PrioritiesFixing the Federation

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Invigorating Business Representationnswbusinesschamber.com.au

The Australian economy is the envy of the industrialised world.

Australia is entering its 16th successive year of sustained economic growth1 – a period of growth unparalleled in Australian history. Unemployment has fallen to historic lows, real wages are rising, industrial disputes are at all time lows and according to the United Nations, Australia is currently ranked third on its Human Development Index2. The Australian Economy is now consistently rated as “the world’s most resilient economy”3.

This economic turnaround can be attributed to a commitment by successive State and Federal Governments to two decades of economic reforms. Governments have undertaken a process of continual reform in the areas of regulation, competition, taxation, trade, workplace relations and in the performance of government enterprises.

One critical area of failure by the Federal and State Governments has been in developing a better model of co-operative Federalism. Despite the economic performance of Australia, the operation of the Federation is becoming increasingly dysfunctional. Blame-shifting between the two levels of government has become the third certainty of life – joining death and taxes.

As the Federal Treasury has noted “joint government involvement in the same functional areas raises significant challenges including complexity for the public, cost and blame-shifting, and possible duplication or gaps in service delivery”4.

Increasingly, major debates in areas such as taxation, infrastructure, health, workplace relations and education have become demarcation disputes between the Federal and State Governments.

During 2007, the debate over the nature of the Federation has accelerated with the Commonwealth indicating interests in the Murray-Darling basin, Mersey Hospital, the ports, indigenous affairs in the Northern Territory and Queensland local government amalgamations. The Federal Opposition has also flagged a possible takeover of public hospitals if hospital performances do not improve by 20095 and a willingness to cut State GST payments if it has to do so6.

Events appear to have overtaken the capacity of the Council of Australian Governments (COAG). Whilst COAG is charged with the responsibility to “initiate, develop and monitor the implementation of policy reforms that are of national significance and which require cooperative action by Australian governments”7, it can be argued that the institution has become focused on dealing with “low hanging fruit” and is currently incapable of dealing with the more vexed issues facing the Federation.

The States have also created their own organisation “the Council for the Australian Federation”. The Council, which is modelled on the Canadian Council of the Federation9, deliberately has no Federal membership and is a Council of State and Territory representatives. The objectives of the Council include “complement the work of COAG and facilitate COAG-based agreements with the Commonwealth by working towards a common position among the States and Territories” and “reach collaborative agreements on cross-jurisdictional issues where a Commonwealth imprimatur is unnecessary or has not been forthcoming”8.

The concern of business is that the dysfunction of the Federation has become a drain on Australia’s capacity to achieve and grow. The Business Council of Australia conservatively estimates the cost of this dysfunction to be $9 billion10, or put another way, the cost of this dysfunction is in excess of the entire Budgets of the Tasmanian11 and Northern Territory12 Governments.

Executive Summary

ABS, Australian National Accounts: National Income, Cat No 5206.0, March 20071 http://hdr.undp.org/hdr2006/statistics/ The Human Development Index (HDI) is a comparative measure of life expectancy, 2 literacy, education, and standard of living for countries worldwide.International Institute for Management Development (IMD) World Competitive Yearbook 2006 (Australia has held title 3 of most resilient economy for five successive years)Federal Treasury, Budget Papers 2005/06, 4-17 4 Leader of the Opposition, Media Release, 23 August 20075 The Australian, Monday 27 August 2007. Rudd Statement to the Australian regarding ALP Health policy and funding “This will involve a 6 parallel reduction in the commonwealth outlays to the states and territories from all sources for these hospitals. This includes the Australian Health Care Agreement, specific purpose payments and other such funding arrangements.” http://www.coag.gov.au/about.htm (27 August 2007)7 http://www.premcab.sa.gov.au/dpc/government_caf.html8 For more information visit http://www.councilofthefederation.ca/9 Business Council of Australia, Reshaping Australia’s Federation, Pg v10 Department of Treasury and Finance (Tasmania), 2007-08 Budget, Budget paper 1.311 Northern Territory Treasury, 2007-08 Budget, Table 2.112

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Australian Business Priorities 2007 surveyed over 460 businesses about a range of business issues.

The breakdown of participation is as follows:

NSW Business Chamber members 306

Hunter Business Chamber members 68

Illawarra Business Chamber members 49

Sydney Chamber of Commerce members 13

Regional chambers 27

In NSW Business Chamber’s 2004 Business Priorities survey, the overwhelming issue for members was high levels of taxation. The concern about taxation as an issue has somewhat diminished since 2004 and this could possibly be attributed to the continued strength of the economy.

However, Australian Business Priorities 2007 found significant concern by business at the extent of government regulation. 43% of businesses rated government regulation a major concern. This compares with 15% who rated the economy as a major concern, 17% for complying with the tax system, 29% for skills development and 33% for infrastructure.

The complete survey findings are available at the end of this report.

It is clear from the findings of Australian Business Priorities 2007 that business believes the performance of government can be improved. When coupled with the findings of NSW Business Priorities 2007, it can be argued that the failures of the Federation are impacting on the performances of both Federal and State Governments.

Australian Business Priorities is structured similarly to NSW Business Priorities, both making assessments against the five major policy areas identified by the Chamber, namely:

Growing a dynamic workforce1

Strengthening the performance of government2

Staying competitive3

Renewing Economic Infrastructure4

Preparing for climate change5

Australian Business Priorities 2007Continued national prosperity, driven by a sustained improvement in the terms of trade and a strong Federal budget position, is masking the deterioration of government performance and also its cost and impact on Australian businesses.

A climate has developed whereby interactions between the Commonwealth and the States have become subservient to the politics of the day, or are being dealt with through a complex, haphazard and undisciplined distribution of cash that inspires little confidence in the integrity of the process.

To allocate blame to either level of government would be to simply perpetuate the dysfunction. No level of government is free from blame and no political party as yet has offered a comprehensive solution.

NSW Business Chamber believes 2008 should be recognised by all levels of government as the Year of the Federation with a Constitutional Convention held to identify ways of improving the performance of the Federation. Importantly, 2008 marks only the third year since Federation when no Federal or State Election is scheduled. The absence of elections provides a window of opportunity to develop a new framework for the Federation.

RecommendationsThat 2008 be declared the “Year of the Federation” with 1 a Constitutional Convention held to identify ways of improving the performance of the Federation.

Constitutional Convention to mark a formal end to 2 unilateral Commonwealth incursions into State issues and an end to State obstruction of Commonwealth goals.

The Constitutional Convention to determine which layer 3 of government is responsible for vocational education and training.

Fast-tracking of national consistency and standards for 4 school education across Australia.

Federal, State and Territory Parliaments to all have fixed 5 four year terms – and for elections to be held on the same day every four years.

Formal referral of workplace relations powers by the 6 States to the Commonwealth.

Federal, State and Territory Governments to develop 7 nationally consistent and sensible Occupational Health and Safety laws.

Productivity Commission to undertake an independent 8 review of the GST distribution formula.

The appointment of a Federal Minister for Infrastructure 9 who will work with the States to develop a National Infrastructure Plan.

The Federal, State and Territory Governments to develop 10 an integrated policy framework and platform for climate change initiatives.

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Australia is experiencing its greatest employment boom in history. Unemployment has fallen from 5.2% in October 2004 to 4.3% in August 2007. Since the last Federal Election, 752,600 jobs have been created, including 546,300 full time jobs13.

At the same time, vacancy levels have risen by 31% from 127,600 in August 2004 to 165,000 in May 200714.

Skill shortages will only worsen in coming years with the 2007-08 Budget Papers estimating continued employment growth and the impacts of the ageing of the population increasingly felt. The ageing of the population will be a drag on the national economy with real GDP growth over the next 40 years expected to be 1.6% compared to 2.1% for the last forty years15.

According to the Department of Employment and Workplace Relations, Australia will face a shortage of 195,000 workers by the end of 201016.

The challenge for all levels of government will be to increase the size of the workforce through migration, increase workforce participation, and identify the appropriate mix of education, training, tax and welfare measures that will encourage continued productivity growth.

Workplace RelationsFollowing the 2004 Federal Election, the Federal Government indicated its intention to use the Corporations power of the Constitution to develop a single workplace relations system.

In November 2005 the Workplace Relations Amendment (WorkChoices) Act passed through the House of Representatives and in December was passed by the Senate. The new system commenced in March 2006.

The new legislation was challenged by all States and Territories in the High Court and in November 2006, the High Court rejected the arguments of the States by a margin of 5 – 2. It should be noted that the Corporations power does not extend the national system to State based employers that are not constitutional corporations.

Since the introduction of the new Federal system, industrial disputes have fallen to the lowest level in Australian history. The effect of this decline is reflected in the Australian Business Priorities Survey. For the first time ever, concern about industrial disputes ranked 72nd (last) of the 72 questions asked about business concerns.

Over 417,900 new jobs have been created since the introduction of WorkChoices in March 2006, 84% of which are full time jobs17.

The Federal Opposition has committed itself to re-regulating the current national system of workplace relations and also to seeking a formal referral of powers from the States rather than relying on the Corporations power.

Re-regulating industrial relations was a significant potential concern. When asked about a “rollback of industrial relations reform” 39% replied this was a “major concern” in the Australian Business Priorities Survey.

It should also be noted that the NSW Labor Government has already indicated its opposition to any formal referral of powers. The NSW Government continues to operate a “shell” industrial relations system with an Industrial Relations Commission.

The NSW Government has adopted and maintained an antagonistic response to the Federal legislation. To combat the new system, the NSW Government has quarantined most public servants in the State system. In November 2006 it passed legislation applying NSW workplace relations coverage to all workers under the age of 18 employed by constitutional corporations on or after 27 March 2006. The NSW legislation for employees under the age of 18 brings these employees back under the State unfair dismissal regime and effectively requires their employers to meet both NSW state award standards as well as Federal standards. This confrontational duplication of regulation for employees under the age of 18 is a clear disincentive to employ young people, and is particularly dysfunctional at a time when the nation is seeking to encourage traineeships and apprenticeships.

This youth legislation followed legislation which deemed NSW consent awards to be enterprise agreements for any constitutional corporation they applied to immediately before 27 March 2006 with no simple, costless way of determining whether a particular award had become an enterprise agreement or not.

The NSW Government has also indicated its intention to restrict access to Government procurement contracts from companies that do not meet NSW award standards. This decision has further complicated procurement in NSW.

RecommendationsThe States with “shell” workplace relations systems outside the Federal system should refer their workplace relations power to the Commonwealth.

Federal workplace legislation should support the capacity of employers and employees to determine their own patterns of work and working conditions appropriate to the workplace so far as is consistent with reasonable protections.

1 Growing a dynamic workforce

ABS, Labour Force, Cat no 6202.0.55.001 13 ABS, Vacancies, Cat no 6354.014 DEWR, Workforce Tomorrow, November 200515 Ibid16 Australian Bureau of Statistics, Cat No: 6202.0.55.001 Table 02. 17 Labour force status by Sex – Seasonally adjusted

Occupational Health and SafetyBoth the Government and Opposition have indicated support for national occupational health and safety laws, though both clearly have different interpretations about how such legislation would work.

It is not clear how such a national system would work, or how it would be achieved although the Federal Opposition has indicated a preference for a collaborative approach, with financial incentives, which results in harmonisation without the Commonwealth displacing State rights in this area.

It also needs to be acknowledged that State and Territory governments are themselves seeking to better align features of their OH&S and workers compensation systems.

However it is evident that whatever mechanism is to be used, it needs to deliver outcomes that result in a significantly more effective and efficient system.

Already the expanding use of Comcare as a means of delivering a national OH&S system for some employers has created complexities in the OH&S area. As the Federal Shadow Minister for Industrial Relations has acknowledged “on one work site there can be multiple systems in operation and confusion about who is covered by Comcare and who is not” and “this confusion and lack of consistency presents very serious issues for the way in which the market functions as companies operating in the same market face different compliance and enforcement regimes and therefore different costs. Rather than introducing policy that reduces red tape and regulation, we are creating a very uneven playing field for firms competing in the same markets”18.

Companies covered by Comcare fall within Federal OH&S law, however their contractors, subcontractors and suppliers inevitably are covered by State law. This potentially means that two OH&S systems with differing standards can and do operate on the same worksite.

RecommendationProgress towards a nationally consistent OH&S system has been slow and limited. Uncoordinated change produces confusion, cost and complication for business. Commonwealth, State and Territory Governments must work constructively together to achieve nationally consistent but sensible OH&S laws.

EducationThere is increasing conflict between Federal and State Governments about the conditions of tied funding.

The issue for education is the shared responsibility. While the responsibility of the Commonwealth is focussed on the delivery of school education outcomes, it is the responsibility of the States and Territories to administer the allocation for individual school operation. In an attempt to deliver increased national consistency, the Commonwealth is initiating a range of interventions such as increased funding for teacher professional development and in the case of Australian Technical Colleges (ATCs), operation of the school.

Each State and Territory has their own standards for school reporting against achievement and jurisdiction specific curriculum. As a result, there is little in the way of appropriate benchmarks to clearly communicate achievement and identify minimum standards for literacy and numeracy across the country. There is no nationally consistent starting age for students and there is no single statement of achievement for students exiting the school system at Year 12. The impact of this is felt by the 80,000 students who move interstate each year.

The lack of consistency in the starting age for students and the lack of an agreed common curriculum for english, maths, science, history and geography results in many difficulties. Employers cannot easily assess the educational accomplishments of potential recruits and students in areas close to State/Territory borders or who move between jurisdictions.

There is a legislative requirement tied to funding for States and Territories to develop a single national curriculum for english, maths, science, civics and citizenship and information and communications technology (ICT) to be implemented by 1 January 2008 along with common testing standards. For the business community this is a step in the right direction.

To achieve change, the Australian Government is increasing funding allocations to the States and Territories, enabling them to manage the operation of the public school sector.

A further issue for school education is that while the Commonwealth provides 100% funding for privately operated schools, it is administered by the States and Territories and therefore based on state legislation and Boards of Studies requirements rather than to nationally agreed standards.

RecommendationWhile there has been an attempt to progress national consistency and standards, including the establishment of a single national statement of attainment for year 12 school leavers, the progress has been slow. The States should become more willing participants in these negotiations and the Commonwealth should provide the appropriate incentives to do so.

Speech by Julia Gillard to the Victorian Division of the Safety Institute of Australia, 29 August 200718

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Australian Technical CollegesThe establishment of Australian Technical Colleges (ATCs) has met with mixed success around Australia. The process has been impeded by both Federal and State Government requirements which means that co-operation between the two levels of government has been in many places close to impossible.

In NSW for example, opportunities for shared use training infrastructure through state funded schools and TAFE colleges has not occurred to any great extent. This has resulted in a duplication of resources as additional funding is spent on infrastructure that is not used to its full capacity.

Additionally, both levels of Government are creating vocational focused institutions – ATCs and NSW Trade Schools. Whilst generally this is beneficial for skills development to address trade shortages, it is adding complexity and confusion for employers who are being approached to participate in these activities through employment of school-based or part-time apprentices. In a number of regions there is both a Trade School and an ATC planned or operating.

In NSW/ACT there are nine ATCs in various stages of development and operation and at least 10 Trade Schools have been announced by the NSW Government.

The ATCs are running behind schedule and behind budget. Any effective utilisation of existing infrastructure has not occurred.

ApprenticeshipsThe funding of apprenticeships occurs at a Federal level, in many cases utilising State based facilities (TAFEs), whilst the structural elements of learning are controlled by State authorities.

Again this is a shared responsibility between the Commonwealth and States/Territories. The three year bi-lateral skilling agreements are based on agreed priority skill areas and therefore performance outcomes are based on the numbers trained in these areas. As part of this agreement, the Commonwealth provides funds for employer and apprentice incentives, including programs such as ‘tools for the trades’, while the Commonwealth and the individual jurisdiction identifies the priority training areas and shares responsibility for the provision of funds for the delivery of training, managed by the State and/or Territory.

The Commonwealth and the States and Territories agreed in 2000 to the full implementation of User Choice for the delivery of Vocational Education. This is where the employer has the choice of training provider (TAFE as a publicly funded provider or a private Registered Training Provider). Full implementation is far from being achieved and consequently acts as a barrier to effective workplace specific training in NSW.

While it is acknowledged that the vocational training initiatives introduced over the last 10 years have significantly increased the numbers engaging with structured Vocational Education & Training, the current model does not facilitate responsiveness to the changing skill needs of business.

The allocation of funds to TAFE based on Annual Student Contact Hours (ASCH) results in prescribed delivery mechanisms that are time based rather than competency based and will not lead to responsive training. It is critical that flexibility in delivery and funding models be prioritised to build the skills needed by existing and older workers as well as to assist those who are seeking employment to leave the welfare system.

RecommendationsThe vocational training sector should be supported to accommodate the changing needs of both individuals and business. The current funding model should be simplified and focussed on achieving employment outcomes of training not the delivery structures. The current model of shared responsibility between the Commonwealth and the States and Territories must also be reviewed to determine if improved delivery could be achieved by transferring responsibility to one or the other.

The greatest impediment to the performance of all levels of government is the current operation of the Federation.

COAG has not demonstrated a capacity to deal with complex issues or to provide a setting for issues to be fast tracked. The twice a year COAG meeting appears to be focused on what can be achieved in a day rather than on providing real solutions to complex policy issues.

The Commonwealth has committed itself to a more interventionist path, but without giving details of the structure of that path. The Prime Minister’s view on possible interventions is as follows:

“We should want and aspire to achieve the best possible outcomes for Australians wherever they might live and by whatever method of governance will best deliver those outcomes. Sometimes that will involve leaving things entirely to the states. Sometimes it will involve cooperative federalism. On other occasions, it will require the Commonwealth bypassing the states altogether and dealing directly with local communities”19.

Similarly, the Leader of the Opposition has said:

“The challenge for a future Labor government will be to rebuild the Federation. And it is my argument that the Federation can be rebuilt based on the principles of co-operative (rather the coercive) Federalism. If Federal Labor succeeds in this enterprise, it will create a sustainable political and constitutional mechanism to deliver lasting reform to the nation; to implement a progressive policy agenda that is likely to endure beyond subsequent changes in the political cycle at either a Commonwealth or State level”20.

Subsequent to promoting co-operative Federalism, the Leader of the Opposition has stated his support for a re-regulated single workplace relations system, a possible takeover of the State based hospital system, constitutional recognition of Local Government, a re-constituted GST agreement and a referendum to provide the Australian government with more powers.

The Commonwealth can have confidence about any intervention because of the significant vertical fiscal imbalance (VFI) that occurs between the Commonwealth and the States. According to the NSW Government, “the Commonwealth collects around 80% of national taxation revenue (including the GST), but is responsible for around 54% of total expenditures. The States collect around 16% of total taxation revenue but undertake around 40% of all government outlays”21. Levels of VFI in Australia are very high compared to federation style governments in the USA, Canada and Switzerland22.

The exaggerated levels of VFI, combined with a willingness by the current Federal Government to intervene in traditional State matters is seeing a redefinition of the work and the roles of the States.

The Commonwealth has already, through the use of the Corporations power in the Constitution, taken over Workplace Relations and it is also seeking control of administration of the Murray Darling basin and Mersey Hospital in Devonport. The Commonwealth has also launched a major intervention in the administration of indigenous affairs in the Northern Territory.

Each intervention by the Commonwealth has both supporters and critics. Indeed, NSW Business Chamber has been a vocal supporter of the Commonwealth’s intervention in workplace relations.

The Commonwealth argues that it intervenes to improve policy outcomes. The States argue the interventions are haphazard, more about politics than economic outcomes and are producing sub-optimal outcomes.

An economic analysis of the issue undertaken by the BCA, prices these inefficiencies at $9 billion per year. The trend forwards the centralisation of the Commonwealth is continuing without any coherent or co-operative plan to deal with this. It should be noted that the same criticism can be made of the Opposition who have made commitments to fund the construction of 2,650 extra trade workshops in schools without providing funding for the technical teachers needed for the classrooms23. The Opposition has also indicated a willingness to take control of the hospital system and fund it through ending the current GST Agreement.

RecommendationsDeclare 2008 the “Year of the Federation” and establish a Constitutional Convention in 2008 to assess the current performance of the Australian Federation and to recommend measures that improve performance as well as cut duplication and waste.

Recommendations from such a Convention must include commitments to improve funding and accountability mechanisms between all layers of government and to end the regular incursions and demarcation disputes between the Commonwealth and the States and Territories.

The Commonwealth, State and Territory Parliaments should all have fixed four year terms – and for elections to be held on the same day every four years. Appropriate mechanisms should be put in place in all State and Federal Parliaments to allow this to occur. The benefit of simultaneous elections, similar to that in the United States, is that it would limit blame-shifting between the different levels of government.

2 Strengthening the performance of government

Prime Minister, Speech to Millennium Forum, 20 August 200719 Address by Kevin Rudd MP, Don Dunstan Foundation, 14 July 200520 NSW Treasury, Benchmarking Australia’s Intergovernmental 21 Fiscal Arrangements (Interim Warren Report), March 2006, pg 13

ibid22 Kevin Rudd MP, Budget Reply Speech, 10 May 200723

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TaxationThere is no difference between the Federal Government and Opposition in relation to their stated taxation goals. Indeed, this will be the first election where a Federal Opposition has gone to the people with the same Taxation policy as the Government.

The Commonwealth’s economic position is strong with net debt decreasing from 18.5% of GDP in 1995/6 to negative $12 billion in 2006/07. To create a sense of proportion, if net debt levels in 2007/08 were the same as 1995/96 this would mean a debt level of $170 billion. At the same time it should be noted that State Governments across Australia are increasing debt levels to fund significant infrastructure programs.

The Government’s medium term fiscal objectives are as follows:

“maintaining budget surpluses over the forward estimates period while growth prospects are sound; not increasing the overall tax burden from 1996-97 levels; and improving the Australian Government’s net worth position over the medium to longer term... this means that the Government achieves budget balance over the cycle through a disciplined approach to spending and not by recourse to increased taxation”24.

These objectives have also been accepted by the Opposition who are not proposing any changes to taxation. It should be noted Federal Labor has committed itself to continued Budget surpluses in the order of 1% of GDP and the Preliminary Budget Outcome for the 2006/07 Budget being $17.3 billion or 1.7% of GDP25.

Whilst both sides of politics go into the election with clearly stated taxation policies in relation to the Federal Budget, the same clarity does not occur in relation to the GST Agreement.

NSW and Victoria however continue to express concern about the outcomes of the Commonwealth Grants Commission (CGC) in allocating the GST. The current GST formula involves nearly 400 variables and rewards inefficiencies. The NSW Government is undertaking, through IPART, a review of the GST formula and its impact on NSW26.

The CGC process of allocating the GST is clearly inefficient and needs reforming. The Federal Treasurer best summed up the complexity of the current process when he said “The State Governments spend huge resources putting their cases to the Commonwealth Grants Commission. The Commonwealth does not even put in a submission. In fact, State Treasuries probably spend more time on this than practically anything else”27.

The Commonwealth has consistently argued that any changes to the current GST arrangements will not occur unless there is unanimous agreement by the States. The Opposition has traditionally supported this approach, however it could be argued this has changed with the advent of the Federal Labor policy to possibly takeover public hospitals.

NSW Business Chamber has argued for an independent review to be undertaken by the Productivity Commission given its reputation for independence and rigour. The weakness of the NSW IPART Review into the GST formula is that it will be purely seen by the other States as a means by which NSW can increase its share of GST distributions. An independent review by the Productivity Commission could make recommendations regarding simplifying the application of horizontal fiscal equalisation (HFE), and identify distortions and areas of inefficiency or effectiveness.

RecommendationThe Productivity Commission should undertake an independent review of the GST distribution formula as a precursor to simplifying the GST agreement and removing the agreement’s economic distortions.

3 Staying competitive

Treasury, 2007/08 Budget, Budget Paper 1 – 524 Hon Peter Costello MP, Media Release, 21 August 200725 Hon Morris Iemma MP, Media Release, 16 August 200726 AB News, Interview with the Federal Treasurer, August September 200527

Australia has experienced sixteen consecutive years of economic growth. Sustained economic growth creates its own challenges – skill shortages, crowded trains, bottlenecks on our roads and ports. Australia is operating at near capacity.

The prosperity has put pressure on physical infrastructure – roads, energy, public transport and telecommunications. The demands of drought have created unique pressures in the management of water and land.

It was possibly because of these dangers that the Treasury Secretary has taken to reminding Australians about an editorial from the Economist which stated “if you look at history, Australia is one of the best managers of adversity the world has seen – and the worst manager of prosperity”28.

Australia has an infrastructure deficit. This however is not the same as poor infrastructure. As Infrastructure Partnerships Australia correctly point out, such long term economic growth could not have occurred if Australia had poor or degrading infrastructure29.

Clearly an infrastructure deficit impacts on Australia’s capacity to be productive and to reduce economic blockages. The Commonwealth has particularly expressed its concern about the state of the ports throughout Australia and has threatened a Federal Government takeover of the ports30. All areas of infrastructure, except broadband, are areas within State control (eg roads, public transport, water utilities, electricity, education, ports etc).

The States however argue that even with the largest infrastructure program on record (for example NSW has an infrastructure program of $50 billion over the forward estimates), they need additional support from the Commonwealth to meet increasing needs for infrastructure and services.

The truth is that “without functional relationships between Commonwealth and state governments, the abundance of investment capital for infrastructure will count for very little in helping to meet community expectations”31.

RecommendationThe Commonwealth should appoint a Federal Minister for Infrastructure who will be responsible for working with the States and Territories to develop a National Infrastructure Plan. This approach should improve national infrastructure coordination, planning and forecasting mechanisms.

4 Renewing economic infrastructure

Ken Henry, Address “Managing Prosperity”, 2 November 200628 Infrastructure Partnerships Australia, Australia’s Infrastructure Priorities: Securing Our Prosperity, 200729 Hon John Howard MP, Media Release “Regulation of Ports”, 19 August 200730 Infrastructure Partnerships Australia, Australia’s Infrastructure Priorities: Securing our Prosperity”, pg 731

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Responding to global warming will be one of the great policy challenges facing all governments in coming years.

The world is warming and this will have implications for our ecosystem starting with the availability of a reliable and sustainable water supply, crop yields and eventually, the very shape of global coastlines and human health.

Whilst estimates about the extent of global warming are varied, there is little doubt it will become an escalating cost to the world economy over coming decades.

The Stern Report, commissioned by the UK Treasury, argues that society must treat the costs associated in mitigating global warming as a longer term investment in the sustainability of modern economies.

“Mitigation – taking strong action to reduce emissions – must be viewed as an investment, a cost incurred now and in the coming few decades to avoid the risks of very severe consequences in the future…. The benefits of strong, early action considerably outweigh the costs”32.

Data from the World Resources Institute Climate Indicators Tool (CAIT) indicates that 68% of all emissions relate to what could be called “economic emissions”, namely 24% power, 14% industry 14% transport, 8% buildings and 5% other energy emissions33. This reflects the fact that CO2 emissions per head are strongly correlated with GDP per head.

This is significant because statistically Australia has one of the highest emissions per capita, and if structural changes are not made in the economy our prosperity will forever be linked to these emissions.

Taking Global LeadershipIndividually Australia can do little to physically reduce the existence of carbon in the global atmosphere because even a 60% reduction of 1.6% of global emissions is a global reduction of less than one percent, which will not avoid dangerous climate change. Furthermore, there is literally nothing that can be done by one State to improve the global problem of climate change.

Despite this, Australia can make a significant contribution to the climate change challenge through its use of global institutions and national leadership. Unfortunately the current Federal-State relationship is limiting meaningful action and limiting Australia’s opportunity to benefit from the emerging climate boom.

To use global institutions and make a meaningful contribution to the global climate change challenge, the Federal Government must take leadership to decouple our economic success and prosperity from future emissions growth. This will send a powerful message globally, provide a road map for developing nations to achieve the same outcomes, and stimulate economic activity that can future-proof the Australian economy.

Federal Government leadership, instead of small scale State Government initiatives, would be most effective by

implementing coordinated and straightforward market >mechanisms that appropriately internalise the cost of carbon emissions (ie an emissions trading scheme)

developing simple complementary policy measures >and incentives that promote long-term investment, research and development in climate change solutions (ie accelerated depreciation), and

creating far-reaching education programs for business >and consumers that outline the benefits of decoupling economic prosperity from emissions growth and practical measures to achieve this (ie climate change is not a threat to our livelihood, but an opportunity).

The problems that have emerged from the current Federal-State relationship include

the development of a National Emissions Trading >Scheme by State Governments that may be ignored by the Commonwealth because it was ‘created by the States’

multiple reduction targets and legislative requirements >that increase costs for businesses operating across different States

different regulatory structures targeting similar, yet >different aspects of carbon emissions, causing the emergence of “green tape” and creating perverse, and often contradictory and environmentally harmful outcomes.

the piecemeal distribution of government funding and >incentives that results in many climate change initiatives being started, but many of them not having enough funding for successful development through to venture capital funding or commercialisation.

5 Preparing for Climate Change

UK Treasury, Stern Report, Executive Summary, 200632 www.wri.org33

Climate Change RegulationImproving Federal-State relations will increase Australia’s ability to contribute meaningfully to the climate change challenge, but more significantly for the economy and business, will reduce the impact of “green tape”.

Recent research by NSW Business Chamber has shown that Australian businesses face up to five layers of environmental regulation – international law, national law, state law, local councils and the judiciary – and this has produced a dramatic increase in areas and types of environmental actions needed to be taken by business.

“Green tape” over the next twenty years is expected to be as significant to the profitability and competitiveness of business, as “red tape” has been over the past twenty years.

Left unchecked, the desire to improve climate outcomes will make “green tape” a major issue for businesses in coming years with the size and scope of regulation from all layers of government increasing.

An uncoordinated, ad hoc approach to this issue by governments could diminish the goodwill of businesses wanting to improve emissions processes and also result in Australia losing competitive advantage in key industries.

It could also result in differing levels of government releasing conflicting and overlapping legislation and thereby repeating some of the lessons of the “red tape” experience of recent decades.

In conclusion, the climate change challenge is both the biggest opportunity and challenge for Australian governments. Success will come from a cooperative relationship between the Federal and State Governments that minimises “green tape” and maximises the economic opportunities of cleaner development, alternative energy and global leadership.

RecommendationThe Federal Government should accept the leadership position of developing the policy framework to deal with climate change and both levels of government should implement policies in a coordinated and complementary way.

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How many persons (including owner-managers, partners, full-time, part-time, casuals, etc.) are employed by your business?

response

Less than 20 56%

20 – 99 30%

100 – 999 11%

1000+ 3%

Does your business export?

response

Yes 24%

No 76%

In thinking about Australia’s current economic situation, how concerned are you at the present time about each of the follwing matters?

no concern minor concern moderate concern major concern

High level of government spending 12% 31% 43% 14%

Rate of inflation 7% 31% 47% 15%

Level of taxation 2% 7% 40% 51%

Level of interest rates/cost of finance 1% 19% 41% 39%

Availability of finance 13% 41% 33% 13%

Unemployment 13% 45% 31% 11%

Foreign debt/current account deficit 14% 31% 41% 14%

Exchange rate too high 19% 36% 30% 15%

major concernmoderate concernminor concernno concern

Exchange rate too high

Foreign debt/current account deficit

Unemployment

Availability of finance

Level of interest rates/cost of finance

Level of taxation

Rate of inflation

High level of government spending

In the context of your own business to what extent are each of the following taxation matters a cause for concern at the present time?


GST 8% 34% 39% 19%

Company Tax 11% 23% 41% 25%

Fringe Benefits Tax 13% 24% 33% 30%

Capital Gains Tax 19% 25% 30% 26%

Personal Tax (PAYG) 6% 21% 43% 30%

Superannuation Guarantee Charge 10% 33% 39% 18%

Payroll Tax 18% 17% 19% 46%

Stamp Duties 15% 19% 25% 41%

Land Tax 25% 19% 22% 34%


Land Tax

Stamp Duties

Payroll Tax

Superannuation Guarantee Charge

Personal Tax (PAYG)

Capital Gains Tax

Fringe Benefits Tax

Company Tax

GST

Australian Business Priorities Survey

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In the context of your own business to what extent are each of the following compliance measures with the tax system a cause for concern at the present time?


Overall complexity of the tax system 3% 10% 43% 44%

Difficulty in complying with company tax 11% 32% 43% 14%

Difficulty in complying with capital gains tax 18% 36% 33% 13%

Difficulty in complying with FBT 14% 29% 31% 26%

Difficulty in complying with GST provisions 8% 35% 40% 17%

Time required to complete BAS forms 7% 31% 39% 23%

Frequency of changes to tax laws and rules 3% 21% 44% 32%

ATO administration of the tax system 6% 28% 42% 24%

Tax audits, penalties & interest 9% 37% 35% 19%


Tax audits, penalties & interest

ATO administration of the tax system

Frequency of changes to tax laws and rules

Time required to complete BAS forms

Difficulty in complying with GST provisions

Difficulty in complying with FBT

Difficulty in complying with capital gains tax

Difficulty in complying with company tax

Overall complexity of the tax system

In the context of your own business to what extent are the following industrial relations and employee matters a cause for concern at the present time?


Restrictions on making enterprise or individual agreements

19% 36% 29% 16%

Complying with employment regulations 10% 26% 38% 26%

Achieving workplace change/business restructuring

12% 31% 37% 20%

Unfair dismissals legislation 15% 31% 28% 26%

Wage levels 10% 24% 46% 20%

Workers compensation costs 5% 17% 29% 49%

Minimum wage increases 18% 41% 30% 11%

Industrial disputes 36% 44% 14% 6%

Union use of Health & Safety Inspections 32% 34% 16% 18%

Compliance with Health & Safety Laws 12% 27% 36% 25%

Rollback of Industrial Relations Reforms 14% 22% 25% 39%


Rollback of Industrial Relations Reforms

Compliance with Health & Safety Laws

Union use of Health & Safety Inspections

Industrial disputes

Minimum wage increases

Workers compensation costs

Wage levels

Unfair dismissals legislation

Achieving workplace change/business restructuring

Complying with employment regulations

Restrictions on making enterprise or individual agreements

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In the context of your own business to what extent are the following skills development and training matters a cause for concern at the present time?


Getting training at a time and place that suits your business

12% 32% 37% 19%

Recruiting employees with appropriate skills 6% 11% 33% 50%

Retaining skilled employees 11% 24% 36% 29%

Poor employee productivity 14% 40% 30% 16%

Quality of vocational edcuation & training 16% 32% 37% 15%

Capacity to recruit skilled migrants 45% 31% 15% 9%

Performance of TAFE 32% 35% 23% 10%

Level of Government funding for training 18% 22% 37% 23%


Level of Government funding for training

Performance of TAFE

Capacity to recruit skilled migrants

Quality of vocational edcuation & training

Poor employee productivity

Retaining skilled employees

Recruiting employees with appropriate skills

Getting training at a time and placethat suits your business

In the context of your own business to what extent are the following issues relating to dealing with government a cause for concern at the present time?


Gaining access to government procurement & tenders

30% 28% 28% 14%

Compliance with (non-tax) government paperwork

16% 31% 33% 20%

Speed of government payment 29% 33% 25% 13%

Level of R&D tax concessions 45% 26% 19% 10%

Gaining access to R&D tax concessions/grants 46% 23% 19% 12%

Level of export assistance 59% 19% 15% 7%


Level of export assistance

Gaining access to R&D tax concessions/grants

Level of R&D tax concessions

Speed of government payment

Compliance with (non-tax)government paperwork

Gaining access to governmentprocurement & tenders

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In the context of your own business, to what extent are the following matters relating to government regulation a cause for concern at the present time?


Complexity of government regulations 5% 19% 37% 39%

Cost of compliances with government regulations

5% 18% 37% 40%

Penalties for failure to comply with government regulations

11% 21% 36% 32%

Compliance with environmental regulations 19% 33% 32% 16%

Compliance with health & safety requirements 9% 25% 38% 28%

Workplace health & safety inspections 16% 29% 37% 18%

Administration of the Trade Practices Act 23% 42% 25% 10%

Corporations Law requirements 17% 42% 31% 10%

Compliance with privacy requirements 13% 40% 31% 16%


Compliance with privacy requirements

Corporations Law requirements

Administration of the Trade Practices Act

Workplace health & safety inspections

Compliance with health & safety requirements

Compliance with environmental regulations

Penalties for failure to comply withgovernment regulations

Cost of compliances withgovernment regulations

Complexity of government regulations

In the context of your own business, to what extent are the following infrastructure issues a cause for concern at the present time?


Access to adequate transport infrastructure 17% 29% 28% 26%

Level of transport costs 12% 20% 30% 38%

Access to adequate mobile phone infrastructure 15% 30% 32% 23%

Level of mobile phone costs 7% 25% 35% 33%

Access to adequate internet infrastructure (broadband & dialup)

8% 24% 35% 33%

Level of internet costs (broadband & dialup) 5% 22% 38% 35%

Level of telecommunications costs 2% 17% 39% 42%

Access to adequate energy infrastructure 21% 38% 26% 15%

Level of energy costs 11% 28% 37% 24%

Access to adequate water infrastructure 25% 35% 25% 15%

Level of water costs 21% 36% 26% 17%

Water use restrictions 26% 35% 23% 16%


Water use restrictions

Level of water costs

Access to adequate water infrastructure

Level of energy costs

Access to adequate energy infrastructure

Level of telecommunications costs

Level of internet costs (broadband & dialup)

Access to adequate internet infrastructure (broadband & dialup)

Level of mobile phone costs

Access to adequate mobile phone infrastructure

Level of transport costs

Access to adequate transport infrastructure

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The following is a summary list of the issues raised in this survey. Please indicate how important improvement in each of these areas would be to the successful operation of your own business.

unimportant minor importance moderate importance major importance

Economic management 25% 35% 25% 15%

Complying with the tax system 21% 36% 26% 17%

Level of taxation 27% 35% 22% 16%

Industrial relations 2% 18% 42% 38%

Skills development 3% 22% 46% 29%

Government regulation 3% 13% 41% 43%

Infrastructure 3% 25% 39% 33%


Infrastructure

Government regulation

Skills development

Industrial relations

Level of taxation

Complying with the tax system

Economic management




NSW Business Chamber represents over 30,000 businesses in NSW and connects over 100,000 locations covering 1.5 million employees across Australia through ChamberNet.

NSW Business Chamber’s purpose is to champion the cause and growth of business. Through research, knowledge and policy achievements, we offer solutions that stimulate business growth nationwide and globally.

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SUBMISSION TO IPART REVIEW OF STATE TAXATION€¦ · of 30,000 small, medium and large businesses and a network of 120 Chambers of Commerce. The members of NSW Business Chamber have