CCIQ Commentary - A Budget of Broken Promises to Business
In analysing tonight’s Federal Budget the Chamber of Commerce and Industry Queensland (CCIQ) is supportive of the commitment to return Australia’s budget position to one of surplus.
The measures announced as part of the Federal Budget are consistent with CCIQ’s call to rein in Government expenditure. We are seeing similar moves across the developed economies of the world and Australia should be no different.
However, some of the announced savings measures will ultimately undermine economic growth in Australia in future years.
The scrapping of the planned 1 per cent company tax cut is profoundly disappointing and is not out-weighed by the benefit of the loss carry back scheme for small business and the already previously announced accelerated instant asset write off.
It is a fine balancing act between cutting spending lines which are not needed or can alternatively be supplied by the private sector and cutting measures that assist business and the national economy.
The secret to achieving a budget surplus as well as supporting the economy is for government to cut back on waste and duplication, and spend taxes more wisely.
Unfortunately a failure to prudently rein in spending when the opportunity presented itself in prior budgets now leaves the budget awkwardly out of step. A surplus for a surplus’ sake is bad for the economy.
There can be no doubt that the difficult position facing the Federal Government is not only driven by the expenditure side but also by falling revenue caused from an underperforming national economy.
For this reason the Federal Budget will be seen as an example of policy inconsistency on the part of the Federal Government in that other initiatives currently being rolled out will significantly hurt the economy and accordingly the budget in future years.
Policies such as the carbon tax will have a net dead weight on our economy from 1 July, as will the superannuation increase which despite what the Federal Government proclaims is funded by the mainstream business community.
The business community will hurt from these measures, the economy will hurt from these measures and ultimately the Federal Budget’s bottom line will hurt from these measures.
We have a headline surplus but with significant fears we are pushing out the burden to future budgets whilst at the same time breaking more promises to business.
The pre-dominant focus for the Federal Government in the 2012-13 budget is to achieve a headline surplus. Therefore rather than spending announcements in portfolio areas the major focus is on growth forecasts and on savings whether achieved through spending cuts, removal of tax benefits or tax hikes including the raising of charges. It is also likely there will be an increase in tax audit activity and recovery processes as this has proven to be a measure governments can use to help bolster revenue.
It is worth highlighting that the need for Australia's austerity measures comes not only from previous undisciplined spending but from an underperforming economy failing to deliver the revenue required. Treasurer Swan has announced revenue collections will be down by a further $5 billion in both 2012-13 and 2013-14 compared to the last forecasts in the mid-year budget update in November. This takes the total write-down in tax collections since the 2008-09 Budget to almost $150 billion over five years.
This adds to the case to not only find substantial savings in order to achieve the surplus objective but also to stimulate the economy through assisting business to ultimately generate additional tax receipts.
CCIQ’s key messages going into the Federal Budget were:
- The budget should take cost pressure off doing business
- A surplus is achievable if the government only spends where spending is necessary. A surplus achieved by removing necessary support for the economy is a false saving
- The budget should announce a policy reversal on the carbon tax
- The budget should outline the wage trade off mechanism to fund the 2013 superannuation levy rise
- The budget should accelerate past investment in skills, education and retraining
- The budget should announce a framework for broader tax reform.
Australia's real GDP is forecast to grow 3¼ per cent in 2012-13 and 3 per cent in 2013-14. The main drivers of economic growth are expected to be business investment and exports. However economic conditions remain uneven across sectors with activity in the non-resource related sectors of the economy likely to be uneven (refer to break-out box for more details on the impacts of the two-speed economy).
New business investment growth is expected to be a strong 12½ per cent in 2012-13 and 8 per cent in 2013-14. This reflects an expectation of unprecedented investment in the resources sector, with investment elsewhere in the economy expected to be subdued.
Exports are expected to grow 4½ per cent in each of 2012-13 and 2013-14 as non-rural commodity export capacity continues to expand to meet global demand. However, the high Australian dollar is expected to weigh on growth of exports of manufacturers and services, notwithstanding the positive outlook for major trading partner growth.
Employment growth is expected to be 1¼ per cent through the year to the June quarter of 2013 and 1½ per cent through the year to the June quarter of 2014, reflecting economic growth, notwithstanding the challenging conditions in some sectors of the economy. The unemployment rate is expected to drift up to 5½ per cent by the end of 2012-13 and remain there through 2013-14.
Wages growth is expected to remain around trend over the forecast period, in line with expected subdued labour market conditions and the moderate inflation outlook. The Wage Price Index is expected to grow 3¾ per cent through the year to the June quarters of both 2013 and 2014.
Underlying inflation is expected to be 2¾ per cent through the year to the June quarter of 2013, including a ¼ of a percentage point increase from the introduction of the carbon price in 2012-13. Underlying inflation is expected to ease to 2½ per cent through the year to the June quarter of 2014.
Headline inflation is expected to be 3¼ per cent through the year to the June quarter of 2013, including a ¾ of a percentage point increase from the introduction of the carbon price. Headline inflation is expected to ease to 2½ per cent through the year to the June quarter of 2014.
Household consumption is expected to grow moderately over the forecast period, broadly in line with household income growth. Nevertheless, consumers remain cautious and the household saving rate is expected to remain elevated. Household consumption is expected to grow 3 per cent in both 2012-13 and 2013-14.
Dwelling investment is expected to remain subdued over the forecast period, with households reluctant to take on more debt and some investors hesitant because of the prospect of continued subdued house price growth. Dwelling investment growth is expected to be flat in 2012-13 before rising to 2½ per cent in 2013-14.
While the Australian economy is expected to grow at around trend over the next two years, much of this growth is expected to be driven by surging resources sector investment and growth in non-rural commodity exports.
Robust demand in Asia should continue to underpin the strong outlook for the resources sector, where investment has reached unprecedented levels. Businesses expect to invest a record $120 billion in the resources sector in 2012-13, around 150 per cent higher than its level just two years before, and 13 times the level of investment before the first phase of the boom. The resources investment pipeline is currently over $450 billion, with more than half of these projects already committed or under construction. Over the forecast period, new business investment as a proportion of GDP is expected to reach its highest level on record.
Strong growth in the resources sector is expected to continue to spill over into other sectors, including parts of the construction sector, parts of manufacturing and parts of the services sector. Together, the resources and the resources-related sectors of the economy are expected to account for 15 to 20 per cent of total GDP over the forecast horizon and grow by an average of nearly 9 per cent per year.
However, conditions remain difficult for those sectors not benefiting directly or indirectly from the resources boom.
The high Australian dollar is weighing particularly heavily on trade-exposed sectors of the economy such as manufacturing and tourism. Ongoing global uncertainty has also reinforced the cautious behaviour that consumers have shown since the global financial crisis and they remain reluctant to take on more debt. This is particularly challenging for the retail sector and other sectors linked to the retail sector such as wholesale trade and road transport. Weak demand and tight credit conditions are also making conditions challenging in parts of the construction sector. While some of the headwinds outside the resources sector are likely to be temporary, some are structural, reflecting the transition that is currently underway across the economy.
Overall, the non-resources part of the economy is forecast to grow at a below-trend average annual rate of 2 per cent over the next two years.
Government revenues continue to be affected by structural changes in the economy and the lingering effects of the global financial crisis. This has led to weaker-than-expected tax receipts compared to those anticipated at the Mid-Year Economic and Fiscal Outlook 2011-12 (MYEFO).
In response, the Government has made $33.6 billion in targeted savings to return the budget to surplus and deliver a number of new budget measures.
An underlying cash surplus of $1.5 billion (0.1 per cent of GDP) is expected in 2012-13, largely unchanged from the estimate at MYEFO. In accrual terms, a fiscal surplus of $2.5 billion (0.2 per cent of GDP) is expected for 2012-13.
On current projections, the underlying cash surplus is expected to reach 1 per cent of GDP in 2017-18, the same year as projected in MYEFO. Net debt is projected to return to zero in 2020-21, also unchanged from MYEFO (Chart 2).
A key challenge that the government faces is the ongoing write-downs in tax-receipts which continue as a legacy of the global financial crisis period of 2007-08.
The tax-to-GDP ratio fell 3.6 percentage points from its pre-crisis level in 2007-08 to 20.1 per cent in 2010-11. This was the biggest decline in the ratio since the 1950s. Relative to the forecasts made at the 2008-09 Budget, total tax receipts have been written down by around $150 billion over the five years to 2012-13.
Combined with the write down in revenues across the forward estimates, tax receipts, as a percentage of GDP, are expected to be significantly lower than their 2007-08 level across the forward estimates.
In 2012-13, the tax-to-GDP ratio is expected to be 1.6 percentage points lower than the 2007-08 level, which equates to around $24.1 billion of tax in that year. Tax receipts are projected to reach 22.9 per cent of GDP in 2015-16, around 1 percentage point below the unsustainable levels reached in the mid-2000s. This means that tax as a proportion of GDP in 2011-12 and the previous two years is the lowest it has been since 1993-94.
Consequently the Federal Government will continue to need to find savings or increase revenue streams in order to maintain a budget surplus.
- Proposed cut to the company tax rate of 1 per cent is scrapped.
- Government is introducing a loss carry‐back, and extending this to a two year carry‐back from 2013‐14. In 2012-13, companies will be able to carry back tax losses of up to $1 million and from 2013-14 companies will be able to carry back losses for two years of up to $300,000 per year.
- From 1 July 2012, small businesses will be able to immediately write off each eligible business asset they buy costing less than $6,500 per asset;
- Assets costing $6,500 or more will be depreciated in a single pool at 30 per cent (15 per cent in the first year);
- Small businesses will be able to claim up to $5,000 as an immediate deduction for new or used motor vehicles acquired from 1 July.
- From 1 July 2012, the Government will introduce the Minerals Resource Rent Tax.
- The Government will also extend the Petroleum Resource Rent Tax to onshore oil and gas projects and the North West Shelf from 1 July 2012.
- Increasing the Superannuation Guarantee from 9 per cent in 2012‐13 to 12 per cent by 2019‐20. This measure was previously to be partially funded through the cut to company tax rate which has now been scrapped.
The Government will continue to fund the Small Business Advisory Service (SBAS) with an additional $28 million over the next four years for additional support and advisory services. An Australian Small Business Commissioner will also be appointed to represent and advocate small business interests to the Australian Government.
The budget included several infrastructure initiatives including:
- Investing over $36 billion in roads, rail and ports over six years to 2013-14 as part of the Nation Building program, including continued support for the Moreton Bay Rail Link project and the Calliope Crossroads road project;
- 76 major new regional health infrastructure projects across Australia, worth $475 million;
- $3.6 billion to duplicate the Pacific Highway by 2016, conditional on agreement with the NSW Government;
- $350 million per year for the Roads to Recovery program and $60 million per year for the Black Spots program;
- Continue building the National Broadband Network to ensure Australians can benefit from the digital economy;
- $30 million for local sporting infrastructure.
From the 1 July 2012, the Australian Industry Participation (AIP) plan requirements will also be extended to apply to all projects receiving significant federal funding. The Government will also be required to publish AIP Plans.
- Additional $50.3 million over 4 years for the Australian Skills Quality Authority which will be provided, in part, by implementing cost recovery arrangements from 1 January 2013. Extra Government investment is $4.2 million.
- National Workforce Development Fund substantially preserved and extended with some changes, including $140 million additional funding in 2015/16. The main changes to the fund are:
- $35.0 million over four years to the National Workforce Development Fund to improve the skills of mature age workers, aged 50 years and over, consistent with their workforce development needs. This is additional and complementary to the previously announced employment incentives of $1000 for mature age employment and other training and careers advisory initiatives – funding of $29.6 million.
- $18.1 million redirected to fund three Centres for Excellence, including manufacturing, green skills and possibly NBN.
- Funding for the Australian Workforce and Productivity Agency unchanged.
- Workforce Innovation Program discontinued – saving $26.3 million.
- Funding for Community Based Service Development Program reduced by $15.7 million.
- An additional $225.1 million over five years in Jobs, Education and Training Child Care Fee Assistance to support increased demand and better target assistance.
- Modest increase to the Migration Program from 185,000 to 190,000 including 129,250 skilled stream places, 60,185 family stream places and 565 special eligibility places. Up to 16 000 places have been reserved for the regional sponsored migration scheme.
- Introduction of graduated tiers of sanctions relating to employer obligations regarding the employment of non-citizens, anticipated to increase revenue by an estimated $1.7 million over three years.
Vocational Education and Training
- Funding of VET National Program Support reduced by $34.4 million
- Additional funding for MySkills website - $6.5 million
- Expand and improve VET-fee help - $3.7 m for redesign; $60.1 million to support COAG reform agreements.
- Discontinuation of $1,500 standard employer commencement incentive payment for existing employees who are converted to an apprenticeship/traineeship that is not on the National Skills Needs List, saving $353.7 m over four years. Employers of these apprentices/trainees will however be eligible for the $500 increase to the standard completion payment.
- Deferral of commencement payment from 3 months to 6 months, saving $47.8 million over four years based on the drop-out rate between 3 and 6 months.
- $19.4 million to fund training in business and finance skills for newly graduated apprentices to prepare them to run their own business.
- Modest reduction in Accelerated Apprenticeship funding to reflect demand; no change to mentoring and advisory funding.
- Continuation of the demand driven, uncapped system.
- Science and research funding substantially preserved.
- Additional $23.4 million over 4 years for disadvantaged participation in university education.
- Postponement of the National Trade Cadetships program by one year.
- One off grant $11.7 million to One Laptop per Child (OLPC) Australia to support expansion of this initiative to primary school students in partnering regional and remote communities and low SES schools
Other Education and Training
- $54 million spread across DIISRTE and DEEWR to take up the recommendations of the Chief Scientist to increase science and maths outcomes.
- Savings of $17.0 million over three years by ceasing to fund the National Career Development Strategy from 30 June 2012.
- From 2012‐13 the Government will more than treble the tax free threshold from $6,000 to $18,200 and from 2015‐16 the tax free threshold will increase further to $19,400 (funded by the Carbon Tax).
- Revenue from the Minerals Resource Rent Tax will go to $1.8 billion worth of increases to family payments from 1 July 2013, and a new Supplementary Allowance of $1.1 billion for eligible income support recipients, with the first payment in March 2013.
- From 1 July 2013 Family Tax Benefit Part A (FTB-A) will increase for all eligible families. For those on the maximum rate, the Government will deliver an increase of $300 per year for families with one child and an increase of $600 for families with two or more children.
- Changing living-away-from-home allowances and benefits by ensuring it can only be used for the expenses of people who are legitimately maintaining a second home in addition to their actual home, for a maximum period of 12 months.
- The Government will change the fringe benefits tax treatment of cars. Instead of providing a sliding scale of rates that rewards those who drive further, the Government is transitioning to a flat rate by 1 April 2014 that will apply irrespective of the distance travelled.