Swan’s no-frills budget

Swan’s no-frills budgetAt the heart of Treasurer Wayne Swan’s election year Budget is a date – not a spectacular policy announcement, nor a raft of tax cuts and especially not a boost for small business.

That date is 2012-13, when the Federal Budget will be back in surplus to the tune of $2 billion – three years earlier than the Government forecast last year and three years before any other major economy gets back in the black.

It’s an impressive achievement made possible by what Swan calls Australia’s economic “position of strength”.

“Our economy and fiscal position remains among the strongest in the world,” Swan told Parliament.

“The Australian economy is today in an important transition phase.”

“Fiscal stimulus is winding back as planned. Business profits are recovering. The private sector is re-emerging as a driver of growth and we are taking steps now to maximise our opportunities for the future.”

But rather than using this position as a springboard for a vote-buying pre-Budget spending spree, Swan has remained true to his word by delivering a no-frills, fiscally-responsible Budget that favours a multitude of smaller initiatives rather than any new, big-bang announcements.

Skills, infrastructure and health are the main beneficiaries, with most new spending initiatives paid for by the controversial Resources Super Profits Tax, which is forecast to add $12 billion to the Government’s coffers over the next four years.

While there are a few goodies for SMEs, few of the big initiatives are new – the cuts to the corporate tax rate and immediate asset write-off policies were announced as part of the response to the Henry Review – and most won’t begin until July 1, 2012.

The numbers

There is little doubt that Swan has delivered an impressive set of numbers thanks to Australia’s incredible performance during the global financial crisis.

While the fiscal deficit in 2010-11 is expected to be $39.6 billion, a surge in Government tax receipts will see the deficit drop to $12.1 billion in 2011-12 and the Budget return to a $2 billion surplus in 2012-13. A surplus of $6.3 billion is projected for 2013-14.

Behind this return to the black are some impressive improvements in the Government’s economic outlook.

Where the Government forecast GDP would fall by 0.5% in 2009-10, it now expects growth of 2%.

Where the Government had tipped a rise in unemployment to 8.5%, it now says unemployment peaked at 5.8% and will now fall to 4.75% – a level that indicates full employment and the savage skills shortages that go with it.

Looking forward, the Government expects GDP to bounce back strongly, growing by 3.25% in 2010-11 before accelerating to 4% in 2011-12.

Underpinning this growth is a strong rise in business investment, which is tipped to increase by 7.5% in 2010-11 and by 4% in 2011-12. Of course, given the resources sector will provide much of this investment, whether these forecasts are too rosy could depend on the mining sector’s reaction to the Super Profits Tax.

Retailers can also take heart from the Government’s projections for household consumption, with spending projected to grow from 2.75% in 2009-10 to 3.5% in 2010-11 and 4% in 2011-12, which looms as a real boom year for the Australian economy.

The key initiatives

While the Budget lacks a real headline-grabbing initiative, Swan seems to have taken a something-for-everyone approach by delivering a host of smaller, targeted items.

The big-picture items include:

  • Tax changes. As well as delivering on the promised third tranche of tax cuts, (which will see the 30% tax threshold for all taxpayers increased from $35,000 to $37,000), the Government will introduce a standard deduction clause for taxpayers that will allow them to deduct $500 of work-related expenses and tax agent expenses from 2012-13, with the allowance rising to $1,000 from 2013-14. Good news for taxpayers, bad news for tax agents, as the Government predicts 6.4 million people could use this option.
  • Skills. The Government will spend more than $660 million in training, apprenticeships and adult literacy and numeracy programs over the next four years. Initiatives included 39,000 additional training places in high-demand sectors, plus support for 22,500 apprentices.
  • Infrastructure. As foreshadowed in the Government’s response to the Henry Review, a new $700 million infrastructure fund will start in 2012-13 and spend $5.6 billion over the next decade – funded by the Resources Super Profits Tax. In addition, The Government will spend $1 billion on the Australian Rail Track Corporation to improve rail capacity.
  • Health. While the Government’s $15.6 billion reform of the national health system was detailed before the Budget, Swan has promised an extra $2.2 billion for improved access to GPs, more money for nurses and $467 million for an e-Health system.
  • Financial services. If there is one sector that is a real winner from the Budget, it is financial services. For starters, the Government will encourage savings by providing a 50% tax discount on the first $1,000 of interest earned on deposits, bonds, debentures and annuity products. The Government will also phase down the interest withholding tax rate on interest paid on offshore borrowing to encourage foreign institutions into the market, and create something called the Centre for International Finance & Regulation to provide research and training in the sector.

What’s in it for small business?

The main initiatives trumpeted by Swan were known well advance of the Budget – the reduction of the corporate tax rate from 30% to 28% and the immediate write-off for assets costing less than $5,000 were part of the Government’s response to the Henry Review.

However, there are some small wins scattered in the Budget detail. These include:

  • Better business registration process. The Government will spend $125.2 million over the next eight years to create a single national online registration system for business names and Australian Business Numbers, meaning businesses will no longer need to be registered in each state and territory.
  • Improved access to the bond market. In order to help reduce the reliance on the banks, the rules under which listed companies can issue bonds to retail investors will be simplified. This will be particularly beneficial to small and mid-cap companies.
  • Cuts to GST compliance costs. Measures in this area include allowing small businesses account for GST on a cash basis to claim input tax credit upfront in relation to hire purchase agreements, and significantly increasing the threshold at which businesses need to interact with financial supply provisions.
  • Improved mediation access for franchise sector. In a good example of the very targeted nature of this Budget, the Government will spend $2.7 million to improve access to mediation for those operating under the Franchising Code of Conduct, the Horticulture Code and the Produce and Grocery Industry Code.

What’s missing?

While industry groups are likely to be particularly pleased with the extra spending on skills and infrastructure, many of their pre-Budget pleas appear to have fallen on deaf ears – or at least a Treasurer keeping a careful eye on spending.

There is no extra money for the consistently under-funded Export Market Development Grants and no extra money for innovation programs, although the Government’s Commercialisation Australia grants product and R&D Tax Credit will come into effect this year.

And while the Government has taken an admirable first step down the path towards simplified tax returns for individuals, there is no sign of similar measures for business.

And once again, no sign of any movement on payroll tax.

Strong platform for election

Swan’s “position of strength” phrase doesn’t just describe this Budget – it also describes the Rudd Government’s position coming into the Federal Election later this year.

By getting the Budget back to surplus three years earlier than expected, Swan has protected Labor from any accusations of poor economic management. Better still, the Government will be able to emphasise that Australia is on track for another boom period.

And it would appear to have more than a little room to move in terms of funding a few pre-Election promises.

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