National Press Club of Australia Women in Economics Network Address

On Wednesday 5 March 2025, EY Regional Chief Economist, Oceania, Cherelle Murphy addressed the National Press Club of Australia for the Women in Economics Network Pre Budget Address.

Address speech

I’d like to pick up on Diana’s point about optimism. I see it all the time in the boardrooms of Australia.

Despite the challenges of 2025, many entrepreneurs refuse to get distracted by the obstacles. To them, the goal is firmly in sight.

Sometimes they duck and they weave, and they constantly reposition for success. They are the Canvas and Chemist Warehouses and the Mecca Brands. To them volatile input prices, rising competition and trade barriers are mere tripping hazards.

These entrepreneurs push the productivity frontier outwards.

We must encourage businesses like these and embrace the animal spirits of their founders and give them the best base from which to succeed.

Today I want to talk about the government’s role in that and specifically the tax system in increasing Australia’s competitiveness. I also want to talk about the urgency of this task in the very uncertain global economic environment that we find ourselves in.

As Diana noted, Australia’s economy is in pretty good shape. The labour market is providing a job to most people who want one. Inflation is cooling. We have some serious problems, including housing affordability and the high cost of living, but we are not fighting a war; we are not bracing against a pandemic.

The federal budget was in surplus for two years despite the heavy burden of COVID-19 and national debt has not grown as badly it has in many other countries.

But from here, things get tougher. The Treasury has told us to expect the budget to deteriorate from the $16 billion surplus delivered last financial year to a $27 billion deficit this year. The fiscal buffers are eliminated, and the debt numbers rise quickly.

So even before counting the billions of dollars of election promises, federal general government spending is projected to grow to $836 billion by the 2028 financial year. The receipts needed to pay for that are expected to rise to $804 billion (with 92 per cent of these coming from taxes). The shortfall isn’t expected to improve much, and the structural budget projections suggest a deficit remains in place for the next 10 years.

As a share of GDP, tax collections are expected to rise to 23.5 per cent in each of the next three years (despite the personal income tax cut). That’s not a historical high, but it is not far off the recent peak of 24.2 per cent (in 2004-05 and 2005-06).

In other words, Commonwealth debt gets larger as a share of GDP, even though we are taxing individuals and businesses more.

So, what do we do?

First, we should ask if there are any cost savings to be had in government. Are AI and digital technologies being used as much as they could to provide more efficient back-office services, allowing front-line services to be delivered by government employees?

Secondly, we could also be running government services through a contestability lens, asking whether they should be provided by the public sector at all. Could another entity provide the service more efficiently and effectively?

The main game though is better allocating precious labour and capital to boost the size of the economy. The IMF recently reminded us that if we get resource allocation right, we maximise our economic potential because it powers up productivity growth.

This is not about the government getting into the nation’s boardrooms. But the government can and should remove disincentives to invest while also increasing the incentives that foster innovation and nimbleness.

A better tax system would go a long way towards achieving this goal, in part, by reducing the economic cost of raising revenue. At the moment Australia raises 62 per cent of its taxes from personal and corporate income. The OECD average is 36 per cent. Inherent in our systems are disincentives to earn income. It’s the exact opposite of what we need.

And if you don’t believe me then former Treasury Secretary Ken Henry said just a few weeks ago at Per Capita’s community tax forum: “Our company tax system retards investment and discourages businesses with foreign shareholders from setting up in Australia.”

The best tax reform would start from a blank page. A long-term, bi-partisan road map with the support of the States/Territory and local governments would be gold medal winning. It would be designed against the principles of fairness, efficiency, simplicity, sustainability and coherence. It would lower the proportion of tax directly sourced from income and increase that from indirect sources such as consumption. It would mean we could fund our expenditure needs without making the tax burden heavier.

The second-best option would be a tax “package” that reforms part of the tax system. This would raise revenue more efficiently and partly compensate those that would bear the biggest burden of the change. Increasing the GST rate to 20 per cent – which would be just over the OECD country average of 19.3 per cent¹  – while retaining the exemptions (like fresh food and education), would generate an extra $80 billion of tax revenues every year. Increasing the GST rate to 20 per cent and eliminating the GST exemptions would generate an extra $132 billion. Some of the proceeds could be used to compensate low-income households.

Importantly this would mean that the foundations of a better tax collection model, with less reliance on personal and business income, would be in place.

Before you roll your eyes, I know this is very hard. It requires the Federal Government to take the risk while the States and Territories receive the benefit. But in the words of Women in Economics Network’s inaugural chair Danielle Wood, who is of course now Chair of the Productivity Commission, “it is not impossible”².

Failing that, a third solution, is very targeted tax incentives to boost productivity enhancing activities and help Australian business attract capital. Sounds like industry policy, doesn’t it? That’s not usually something we economists like.

But our investment to GDP ratio is stuck and has been for around a decade, and fresh data suggests it’s not getting better.

Last week’s numbers showed private capex intentions for 2025-26 were up just 1.8 per cent on the first estimate for 2024-25. This could reflect a decline in construction inflation, but it also could reflect reduced appetite for investment. Today’s national accounts showed a 0.7 per cent rise in business investment in the December quarter.

Internationally, lower company taxes are being used as an incentive to attract commerce for many different reasons. President Trump said he intends to implement a concessional corporate tax rate of 15 per cent for US companies that make products in the US³. (TCJA is currently 21 per cent).

Singapore has targeted incentives that encourage companies to set up or expand their international or regional headquarter activities in Singapore by offering a concessional tax rate of 5 per cent, 10 per cent or 15 per cent on qualifying income.

China offers a concessional corporate tax rate of 15 per cent for new high-tech businesses and 10 per cent for some designated key software businesses and integrated circuits design businesses.⁴

In Australia, over the past 5-10 years, a series of well-intentioned tax integrity measures have broadened the corporate tax base. But Australia’s regime ranks poorly for the high burden it imposes on companies⁵.

The goal posts have shifted, and we are not even running towards them.

If we want productivity to drive economic growth, while geopolitical divisions, climate change and ageing demographics are going to slow it down, policy must shift too.

So, what would our third best option look like? It would offer tax incentives for particular sectors, industries or regions to achieve policy goals. Given Australia is a net importer of technology, Australia should implement targeted tax incentives that encourages firms that are investing in new technologies.

Investment allowances – such as an extra 20 per cent depreciation deduction – and full expensing and enhanced research and development (R & D) tax incentives would encourage incremental business investment. This is the type of policy that can attract foreign capital and deepen the capital base to drive up productivity growth.

Capital deepening allows Australian workers to be more productive and it is important to our standard of living. Had it not been for the capital deepening that occurred over the 10 years to 2023-24, GDP would have been lower by about $70 billion per year, that’s equivalent to everything we spent on recreation services each year – think tickets to the movies, concerts and sporting events – all the fun stuff!

The Productivity Commission pointed out in 2023⁶  that only about 1-2 per cent of Australian firms innovate in ways that are new to the world. With the right settings, I think that proportion could be higher.

It needs to be.

While our Treasurer is rightly trying to talk down the US Administration from slugging tariffs on Australia, we need our companies at home to be doing their absolute best work. We need to be giving ourselves the best chance to survive a trade war that will hurt our largest export partner and damage many of our other international customers.

In 2025, the reform process must, at the very least, begin.

In the US and other markets across the globe, major policy changes happen overnight.

Whoever takes government in a few weeks has to move forward on tax reform with urgency and the opposition parties, state/territory and local governments and business community need to work together to get difficult changes across the line.

We don’t have time for domestic political differences and federation flaws and rent seekers to get in the way.

We are all in this together.