A Budget banking on trust in extraordinary times

A Budget banking on trust in extraordinary times
May 4, 2016 OPR

2016-17 Budget highlights

Revenue: $416.9 billion GDP growth: 2.5%
Expenditure: $450.6 billion Unemployment forecast: 5.5%
Budget position: $37.1 billion Inflation: 2%

Treasurer Scott Morrison warned this would be no typical budget and he was true to his word. The Turnbull government ignored the grand tradition of sweeteners for all in an election year to help the medicine go down. There were income tax cuts, sure, but only for those earning more than $80,000, and most of the other largesse was limited to small and medium sized businesses to help power our much vaunted ideas boom. One of the biggest new ideas in the Budget was a scheme that enlists business help to get the young unemployed into work. But this government is one determined to prove it can live within its means and spending was balanced with revenue measures including tightening superannuation largesse for the wealthy and a ‘Google’ tax targeted at multinationals. Collateral damage was only to be expected in the government’s full charge tilt at jobs and growth in an economy stuck in a painful transition phase.

There was nothing typical about Budget Day either with the Reserve Bank cutting the cash rate to an historic low of 1.75 per cent. The rate cut underlined the precarious nature of the economy with the spectre of deflation now raring up and consumer spending stubbornly immune to monetary policy shifts. While governments in the past have taken rate hikes during an election campaign as a personal affront, no government has ever had to grapple with an RBA warning of ‘very subdued growth’ in labor costs (that would be wages) on Budget Day before, let alone a government hoping to go to the polls in a few short months.  At the very least it will make the government’s sell job for this Budget much harder.

It is clearly banking its attack on multinational tax avoidance will be a vote winner. The government expects an additional $3.9 billion to flow to its coffers over the next four years through this crackdown which will be carried out by a new, 1000 person strong team in the ATO. In addition to legislation passed last year, the crack team will have a new, diverted profits tax, modelled on the UK’s Google’s tax that will charge a 40 per cent tax rate on profits multinationals attempt to shift offshore to lower tax jurisdictions.

Once again, small businesses are the heroes, though the definition has been extended to include businesses with a turnover of up to $10 million a year. The new tax rate for those in this group will be 27.5 per cent. Those with an annual turnover of less than $2 million – who received a cut of 1.5 percentage points last year – scoop up another 1 percentage point win while the 60,000 firms with turnover between $2 million and $10 million are also now included in the new rate. And there will be more down the track though it is a long way down the track …  business has to look way out to 2026/27 to see the promised 25 per cent rate of all businesses. That’s the virtue of a ’10 year’ enterprise tax plan.

Some $750 million will be spent on a new youth employment program to assist up to 120,000 people aged under 25 find work. The new scheme will include skills training, internships and subsidies for business who take the job seekers on. As an incentive, those who sign on to the scheme will receive a $200 payment per fortnight on top of their existing benefit.

Getting rid of the deficit is now a long term plan. So long term in fact, it is no longer in the forward years. The deficit is expected to reduce this year from $39.9 billion to $37.1 billion in 2016-17 and to have shrunk $6 billion by 2019-20. The budget papers also noted a ‘risk that the low inflation, low wage growth and low productivity growth being experienced in many advanced economies could become embedded in lower potential growth over time’. Even so, this is a government determined to be upbeat. While GDP growth would be below par in 2016-27 at 2.5 per cent, it was expected to recover to 3 per cent by 2017/18. We were told our economy was growing faster than the UK, the US, Japan and Germany. The Treasurer said he was ‘upbeat and optimistic’. The trick now will be to convince the rest of us the glass is half full as well.