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Will the budget balloon boom or bust?

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As was widely expected, the 2012-2013 budget is projected to return to a modest surplus of $1.5 billion.

While the business community wasn’t expecting much by way of good news, the question is whether Wayne Swan has focused strategically or, in the pursuit of the all-important surplus, the Government has searched so hard for revenue that it runs the risk of busting the nascent economic recovery altogether. Will it be boom or bust?

Another opportunity missed to reform the tax agenda

BDO has been at the forefront of calling for long-lasting, consistent and economically prudent tax reform for many years. Although the Government has commissioned many studies into tax reform, this budget fails to take advantage of another opportunity to deliver on the big picture, and seek internationally competitive reforms that have been laid out in the reports of the Henry Tax Review and the Tax Forum.

Instead, the budget consists mostly of unstructured, short-term changes to the tax laws designed to legislatively reverse decisions of the courts that have gone against the tax authorities.

This approach has a double detriment attached to it. Not only do the structural reforms that have not been made (for example, reduction of the corporate tax rate to a more internationally competitive level, and meaningful reform of the taxation of small businesses) mean that Australia fails to improve its tax system, the ad hoc changes that have been made (that is, reintroduction of the superannuation surcharge, amendments to the bad debt deduction provisions), tend to decrease taxpayer confidence in the certainty of the tax system.

It is hard to escape the conclusion that many of the measures are designed solely as revenue generating band-aids on an already unwieldy and complex tax system. Time will tell whether such measures will “bust” the already well-stretched balloon, called the Australian economy.

Tenuous nature of the surplus

In order to achieve the surplus and its other spending, the Government has applied solutions that are best described as ad hoc. Many of the revenue projections for the measures announced in the budget are a significant percentage of the $1.5 billion surplus. Failure of any of these measures to raise the projected amounts of revenue will see that surplus disappear as quickly as a deflated balloon.

Further, through a number of its welfare and compensation measures, the budget puts cash into the hands of individual taxpayers. These moneys are intended to be compensation for the cost of living increases in the 2012-2013 year due to revenue measures such as the carbon tax. However, the cost of living increases will continue into 2013-2014. There is no ongoing program to allow for increases to such payments into the future.

Based on the above, BDO considers that this budget aims to inflate the political balloon, rather than to focus on immediate economic remedies. Could this approach potentially bust the balloon? It is possible that the Government intends this budget to be its last during this Parliament’s current term – even though that term does not expire until after May 2013 when the next budget is due? Holding an election before May 2013 will mean that a final accounting on whether the surplus has been achieved will not be available, and the cost of living issues will be a problem for the next Parliament.