You can all breathe a sigh of relief – Wayne Swan’s precious surplus is safe after the World’s Greatest Treasurer unveiled a series of cuts this morning designed to keep the 2012-13 federal budget in the black.
This morning’s budget update – technically known as the Mid-Year Economic and Fiscal Outlook – was brought forward by a month so the Federal Government could have as much time as possible to offset falling tax revenues with eight months of new spending cuts.
The 2012-13 surplus, which had been forecast at a slim $1.5 billion in early May when the budget was released, is now tipped to be $1.1 billion.
To put that in the context of your average personal balance sheet, our surplus has just gone from pocket change to down-the-back-of-the-couch coins.
The reason for the cigarette-paper thin surplus is a sharp drop in tax revenue, forecasts for which have dropped from $252 billion to $248 billion in the space of five months.
That’s what falling company tax revenue (mainly due to lower commodity prices hitting the mining sector) and lower capital gains revenue will do to you, although it does seem that everyone except Treasury has been warning for most of 2012 that revenue was under pressure.
Swan has offset lower revenue with a combination of spending cuts and tax increases, worth $16.5 billion in total.
There are increases to cigarette taxes, increases to the cost of visas for those entering the country and increases to defence spending. Reports suggest most government departments have been asked for a 4% “efficiency dividend” – in other words, find another 4% of cost cuts.
SMEs have not escaped the cuts.
The most prominent SME-related cut announced today is the closing of a fringe benefits tax loophole that allowed workers to salary sacrifice to buy goods and services sold by their companies. Up until this morning, the first $1,333 of these “in house fringe benefits” was tax free. Now that break is gone, at a cost of $445 million over four years.
In addition, the Australian Taxation Office will help raise an extra $1.6 billion over the next four years by focusing on “outstanding income tax lodgements in the micro and small business segments” as well as profit shifting and high net worth individuals.
The government will also move to make large companies (how large a company will be to qualify isn’t obvious at this stage) make pay-as-you-go tax instalments monthly rather than quarterly in an effort to raise a whopping $8.3 billion over the next four years.
Finally, there are $157 million of grants program cuts – including $100 million in savings over four years from “re-targeting” the extremely popular Export Market Development grants program. We are still investigating, but “re-targeting” sounds a lot like a big fat cut to us – more details as we get them.
All of this scrambling to find spending cuts, and the fact that the global growth outlook still remains weak, does make you wonder whether the obsession with protecting the surplus is really worth it.
I can understand it from the government’s perspective – to fail to produce this long-promised surplus next May, just months out from an election, would give the Coalition the sort of opening that Labor desperately wants to avoid.
And I can appreciate the argument from Finance Minister Penny Wong, who says that a surplus gives the RBA room to cut rates. That’s obviously really important right now.
However, the size of the surplus is little more than a rounding error and there is an argument – which the business community is making very loudly right now – that with economic growth patchy at best, the Australian economy is strong enough to withstand a small budget deficit if it meant providing extra support for the economy.
We all would like to see surpluses if the economy was cruising along, but most in the SME community will tell you it is not.
Is this the right time for another round of spending cuts?
Would the RBA really feel it couldn’t cut rates if Swan hadn’t made these spending cuts and had ended up with a small budget deficit?
It does feel like this surplus is being driven mainly by politics. That said; don’t forget that Tony Abbott and Joe Hockey reckon they could produce an even bigger surplus despite having some pretty big spending initiatives they want to put in place.
We don’t get bipartisan support on much these days, but our surplus-at-all-costs obsession is one thing Labor and the Coalition can agree on.