Federal Budget Explained

The Federal Government has released the 2018-19 Budget announcing a deficit at $14.5bn for 2018-19, improved from the $21.4bn deficit expected at the time of the last Budget.  The deficit for 2017-18 is expected to be $18.2bn, again improved from the $29.4bn deficit expected last year.  The Budget bottom line has been improved by a larger than expected tax take due to favourable economic conditions, with receipts $11bn higher than expected.

Gains to business are modest.  The Budget confirms the Government’s commitment to its 10-year enterprise tax plan and extends the $20,000 instant asset write-off.  While investments in infrastructure and income tax cuts will provide indirect benefits, the business community is not the key target of this year’s budget.

The Budget announces personal income tax cuts within a new fiscal framework where taxation as a share of the economy will not exceed 23.9% of GDP.  Income tax cuts are targeted to low income earners before expanding to higher tax brackets.  Under the plan, personal income tax will become flatter by removing the current 37 per cent tax bracket.  These changes will be implemented gradually over the years to 2024-25.

The Budget also has a significant focus on retired voters with a significant aged-care package and support for retirees looking to supplement their incomes, including through starting new enterprises.

The Budget also confirms funding arrangements for a range of infrastructure projects including $971m for the Pacific Highway Coffs Harbour bypass, $400m for the Port Botany rail line duplication and $155m for the Nowra Bridge.  These projects form part of a $24.5bn transport infrastructure package funded by the Government’s previously announced commitment to spend $75bn in transport infrastructure over the next decade.

We know you’re busy so we’ve kept our analysis short, we also have an infographic which can be found here, and the full budget papers are available at www.budget.gov.au.

1 – Budget and economic outlook
The national economy is forecast to grow by 2¾ per cent in 2017-18 before increasing to 3 per cent in 2018-19 and 2019-20.

Momentum in the Australian economy strengthened in the second half of 2017, with solid contributions from household consumption and non-mining business investment.  The Australian economy is being supported by a positive global outlook with global growth having risen to its fastest pace in six years.  The weight of declining mining investment is dissipating while there has been a simultaneous pick up in non-mining investment.

Budget repair has been supported by stronger than anticipated tax receipts, including stronger than expected employment growth which produced more than 367,000 new jobs in the Australian economy over the past year.  These gains may allow the Government to return the Budget to surplus a year earlier than anticipated with a surplus of $2.2bn now expected for 2019-20.  Budget parameters are again underpinned by relatively optimistic wages growth forecasts and Budget projections should be treated with the usual degree of caution.

The Government is leveraging more than $40bn in budget repair measures (38 per cent of which are accounted for by spending cuts) implemented since the 2016 election to pay for new Budget measures.  Projected surpluses are modest while Commonwealth Government debt will peak at around $350bn in 2018-19 or 18.4 per cent of GDP (the equivalent of more than $35,000 per Australian household).

Active efforts to improve the Budget’ bottom line and reduce government debt have been deprioritised with the Government relying primarily on economic growth to reduce the relative size of Australia’s net debt.

2 – Tax
The Budget announces cuts to personal income taxes that will ensure that tax to GDP remains within a new cap of 23.9% of GDP.

The Personal Income Tax Plan will concentrate relief to low and middle income earners by implementing a new tax offset worth up to $530 (the offset will operate in addition to the current low income tax offset).  Following this, the Government will return bracket creep by increasing the current $87,000 threshold applicable to the 32.5 per cent rate of tax.  Finally, the 37 per cent bracket will be completely abolished with a projected 94 per cent of taxpayers facing a marginal tax rate of 32.5 per cent or less.

The lowering of marginal tax rates (over alternative approaches to lowering personal income tax) will assist in improving workforce participation and reduces disincentives that discourage economic activity.

In addition to the Personal Income Tax Plan higher income earners will not have to pay the recently scrapped increase to the Medicare Levy.

The Government has announced its plans to better target the Research and Development Tax Incentive through a new R&D premium for companies with turnover of $20 million or more.  The Government will also impose a cap of $4 million on cash refunds and convert the rate of the R&D tax offsets to a premium above each claimant’s company tax rate.  These changes are expected to save $2bn over the forward estimates.

As previously announced the Government will reduce draught beer excise saving a modest $85m on the cost of beer over four years.  At the same time it will also combat illicit tobacco ensuring tobacco products are sold through the proper channels and saving the Budget $3.6bn over the forward estimates.

3 – Infrastructure
The Government has announced $24.5bn in transport infrastructure spending as part of the $75bn already announced over the next decade.

Project highlights for NSW include:

$971m for the Coffs Harbour Bypass
$155m for the construction of Nowra Bridge
$400m for the Port Botany Rail Line duplication
$50m to jointly fund a business case (with the NSW Government) for the proposed Western Sydney North-South rail line
$100m for the upgrade of the Barton Highway corridor
The Budget announced $200 million for a third round of the Building Better Regions Fund, which supports regional infrastructure and community investments. This will complement the Regional Growth Fund, which is investing $272 million in larger regional infrastructure projects that support long-term economic growth and create jobs in regions undergoing structural adjustment.

The Government has increased its reliance on off-balance-sheet finance, with taxpayers taking on an equity stake rather than providing grants to the states and territories.  This approach enables the Government to increase its infrastructure spend without impacting the Budget bottom line (as new funds directed to infrastructure are offset by new equity held by the Government).  This leaves the Government open to criticism that it is investing in projects that may not be commercially viable and it may not be able to recoup its investments on behalf of the taxpayer.  While not all infrastructure projects need to be commercially viable in order to justify public investment, the true cost of infrastructure may be hidden if asset write-downs are required in future years.

4 – Other measures affecting business
The Government has announced its response to the Black Economy Taskforce Final Report with a view to levelling the playing field for all businesses, and changing perceptions that black economy behaviour is acceptable.

New measures include:

increasing the ability of enforcement agencies to detect and disrupt black economy participants.
changing the Government’s procurement procedures to incentivise tax compliance
consulting on reforms to the Australian Business Number (ABN) system to develop rigorous new identification systems for company directors (DINs).
an economy-wide cash payment limit for large cash transactions of $10,000
additional funding to the Tax Practitioners Board to take action against tax agents that facilitate activity in the black economy.
expanding the taxable payments reporting system to contractors in industries with higher identified risks of not reporting their income.
The Government has confirmed streamlined GST reporting which will affect around 2.7 million small businesses by reducing the number of BAS GST questions to only three and scrapping the requirement for a 20 question worksheet.  It is estimated that it will save each small business an average of $590 per year when fully implemented.

The Government will also provide $17.7 million in additional funding to support entrepreneurs, with a focus on those aged over 45 years. The Entrepreneurship Facilitators program will be expanded to new locations, including in regional Australia, helping older workers leverage their experience into viable businesses.

The Government confirms a $20 million investment in SME Export Hubs. The Hubs will be established to facilitate cooperation among businesses to help sell their products to the world.

The Government also announced it is providing an additional $250 million for the Skilling Australians Fund which will be subject to further negotiations with the states and territories.

The Government will provide $17.4 million over four years from 2018-19 to establish the Skills Checkpoint for Older Workers program, which will support employees aged 45-70 to remain in the workforce.