What does the 2018 Federal Budget mean for your organisation and for the wider Australian economy? AICD Chief Economist Stephen Walters GAICD and Head of Policy Christian Gergis provide their analysis of all the major initiatives, including modest tax cuts, infrastructure spending and for directors moves on phoenixing, director identification numbers and additional funding for regulators.
- An unexpected tax windfall means a promised return to surplus a year earlier, and the deficits in the near term are smaller
- Treasury’s economic forecasts still look optimistic – real GDP growth of 3% and healthy rises in wages
- For directors, there was movement on phoenixing, director identification numbers, and additional funding for ASIC and APRA for the Hayne Royal Commission, although no expansion of the BEAR … yet
- On revenue, the promised personal tax breaks are included, albeit spread over seven years … and the remaining company tax cuts have been retained, although spread over 10 years
- There is increased spending on health, aged care, national security and innovation … and another boost to infrastructure commitments
- The earlier return to surplus and debt reduction mean the coveted AAA-credit rating should be secure
Treasurer Scott Morrison tonight delivered his third Commonwealth Budget, the last before the next federal election, which must be held by May 2019. It was inevitable, then, that there would be goodies, including modest personal tax breaks and more infrastructure spending. But, a decent slice of the predicted revenue windfall – $26 billion over four years - has been applied to an earlier return to surplus and debt reduction. This should keep the ratings agencies happy.
Mr Morrison can say that, not only is he cutting taxes, building infrastructure, and providing targeted assistance to the elderly and the less fortunate, he’ll also start paying down debt, currently worth nearly 19% of GDP. Indeed, the Government will cease borrowing for recurrent purposes this year – no more “bad” debt. It all sounds too good to be true, but the circle is squared by Treasury’s upbeat economic growth and revenue assumptions.
Already, the improving economy and the unexpected revenue windfall mean there is no more talk of “budget emergencies”, or “debt and deficit disasters”. Today’s narrative is about sobriety and prudence, and “living within our means”, even though we’re not, at least not yet. Not until the Budget is back in surplus in two years’ time will we start paying down our ballooning debt.
For directors, the anticipated extension of the Banking Executive Accountability Regime (BEAR) to other financial institutions did not materialise, although this Budget won’t be the final word on governance in the sector. On heartland director issues, there were moves to strengthen the anti-phoenixing framework, develop a new director identification number system, and more funding for ASIC and APRA to weigh in on the Hayne Royal Commission.
This Budget effectively is Plan C. Plan A was expenditure restraint from 2014, but most of the measures foundered in the Senate. Last year’s Budget was Plan B – abandonment of the marooned spending measures and higher taxes, including the contentious bank levy and the planned rise in the Medicare levy. Now, it’s about cutting taxes, building infrastructure and simultaneously paying down debt. If at first you don’t succeed …
What’s missing? Yes, there are tax cuts, as AICD has been advocating, but we called for these as part of a broader tax reform agenda. Perhaps it is too much to ask a government to launch a bold reform agenda this close to an election, but so much more could be achieved if a higher rate and broader base of the GST were on the table, alongside changes to a host of destructive taxes. Instead, we are left with piecemeal changes, however meritorious.
A core problem is that, at 25%, government spending remains too high as a share of GDP. It seems, however, that the strategy now is to lift revenue to match the inflated expenditure share. The AICD has advocated that spending growth be restricted to an average of 1.5% in real terms, but that has proved too much of a stretch with the election looming.
Main risks? It’s the economy, stupid
There are obvious risks with the government’s re-booted fiscal strategy. The planned return to surplus will come unstuck if the economy fails to perform in the upbeat way expected by Treasury. A sluggish economy has been the jagged rock upon which the last decade’s worth of Budgets have founded. The promised surplus in 2019-20 is wafer-thin, so there is little room for slippage.
Also, and more profoundly, structural expenditure commitments, like the very worthy NDIS, now will be funded from recurrent revenue, rather than hypothecated revenue measures like the now-jettisoned increase in the Medicare levy announced last year. A succession of Treasurers has learned that hoping that a cyclical boost to revenue will be sustained for long enough to fund multi-decade structural commitments is a strategy likely to fail.
Economic assumptions still optimistic
As was the case last year, the Budget is predicated on what look like optimistic assumptions about growth in the economy and wages, in particular. Both have been trundling along at subdued rates for years now, but Treasury still is taking a glass-half-full approach to what happens from here.
In summary, the Budget projects the following economic outcomes:
- Treasury expects Australia’s economy to grow by 3% over the next few years, well ahead of the average 2.5% growth in recent years. Only once in the last decade has the economy grown at 3% or more!
- The expected jobs growth is 1.5% in the near term, but 1.25% thereafter. Treasury forecasts that this eventually will see wages growth accelerate from the 2% of recent years to 3.5% by 2020-21.
- The jobless rate should be 5.5% in the near term, the same rate expected by the RBA’s economists, before dipping to 5.25% in subsequent years, and 5% in 2021-22.
- The Budget assumes that commodity prices are higher than previously assumed in MYEFO.
The headline Budget numbers – earlier return to surplus
The Treasurer now promises a return to surplus in 2019-20, one year earlier than was forecast in MYEFO last December. The previous estimate of a small deficit for that year was a rounding error, so it’s not a stretch to now project a wafer-thin surplus. It’s a step in the right direction, helped by the unexpected avalanche of revenue – more than $5 billion worth in 2017-18 alone, particular company tax receipts.
The deficits for the next two fiscal years are assumed to be materially smaller than was the case in MYEFO, and the surplus now is assumed to grow to nearly $17 billion (0.8% of GDP) by 2021-22. National debt (the value of bonds on issue) now is assumed to peak a little earlier in 2019-20 at $579 billion. In the meantime, the interest bill on this pile of debt is more than $1 billion per month!
Main corporate governance issues
The Budget saw announcements in a number of governance areas where the AICD has taken a keen interest.
- $10.6 million will be allocated over two years (from 2017-18) to ASIC, and $2.7 million in 2018-19 to APRA to assist in their involvement in the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. $5.9 million had already been allocated to ASIC in 2017-18.
- The Government has announced a package of reforms aimed at combatting illegal phoenixing, including: introducing new phoenix offences to target those who conduct or facilitate illegal phoenixing; preventing directors improperly backdating resignations to avoid liability of prosecution; limiting the ability of directors to resign when this would leave the company with no directors; and extending the Director Penalty Regime to GST, luxury car tax, and wine equalisation tax, making directors personally liable for the company’s debts.
- There will be $3.6 million allocated to the Department of Home Affairs to create a new unit that will manage the implementation of the Modern Slavery Reporting Requirement.
- The requirement is aimed at preventing modern slavery occurring in the supply chains and operations of businesses operating in Australia.
- As a response to the Black Economy Taskforce, the Government will consult on developing a “rigorous” new director identification system, as part of broader measures to reform the Australian Business Name (ABN) system. The Government will also ban cash payments of more than $10,000 as part of its Black Economy response.
ASIC has been provided with $2.2 million over four years (from 2018-19) to strengthen listed entity financial reports.
- In one of the few measures targeted at NFPs, the ACNC will be provided with $1m for anticipated litigation as it seeks to pursue its regulatory enforcement role.
- $9.8 million has been allocated over two years for an independent review of the Australian Public Service (APS), to be led by a panel with public and private sector experience.
Main revenue measures – personal tax breaks as promised
On the revenue side of the accounts, the Budget has enshrined the Government’s new “rule” that tax as a share of GDP will not exceed 23.9%. This is above the recent run-rate for the tax take of around 22%, but is the first time such a “speed limit” has been included in the Budget Papers.
The major revenue measures included:
- A round of personal income tax cuts in three main tranches.
- First, low and middle income earners will benefit from 1 July 2018 via a lift in the low income tax offset (LITO), with the benefit limited to $530 per year – about $10 per week;
- Second, from 1 July 2022 middle and higher income earners will benefit from rises in the income tax thresholds, as the government returns the proceeds of bracket creep; and
- Third, the income tax thresholds will be reduced from five to four from 2024, with the current 37% tax bracket disappearing.
- The government is sticking with its 10-year Enterprise Tax Plan that includes lowering the corporate tax rate top 25% for all companies within a decade. The first part of the package already has lowered the tax rate for smaller businesses, but the government is pushing ahead with the relief for larger firms, despite ongoing resistance in the Parliament.
- As the Treasurer announced a few weeks ago, the planned rise in the Medicare levy from 1 July this year has been dumped. The NDIS now will be funded from recurrent revenue, although the Budget claims that it is “fully funded”.
- The Treasurer announced measures to tax illicit tobacco, which should raise $3.6 billion over four years. There also will be increased efforts to capture revenue from the so-called “black economy”.
- Instant asset write off provisions for small businesses were extended by one year, for individual purchases below $20,000.
- There was an overhaul of research and development tax breaks to ensure they are better targeted (see below).
- There is a renewed push to collect more revenue from multinational companies.
Main spending measures – billions more for infrastructure
On the expenditure side of the Budget, the measures included:
- $24.5 billion allocated for infrastructure spending, although it’s not clear how much of this is new money, in addition to the $75 billion already promised. The relevant announcements in the Budget included:
- $3.5 billion of funding for roads to help alleviate congestion, a known productivity killer;
- Up to $5 billion for the rail link from Melbourne Airport to the city;
- $1 billion to ease road congestion between Brisbane and the Gold Coast;
- $2.6 billion for projects in Western Australia, including Perth’s Metronet rail project;
- $150 million for the upgrade of the Bruce Highway in Queensland;
- Nearly $400 million for the upgrade of the Sunshine Coast rail network; and
- $177 million for Adelaide’s North-South corridor.
- There is a package for older Australians, including measures to help more people stay in their homes, rather than move into external care. There also are changes to the borrowing program that allows older people not receiving the pension to borrow against their estate, up to 150% of the value of the aged pension. There also is an expansion of the Pension Work Bonus to allow pension recipients to earn more income.
- There is more funding for health, including:
- Addition of new drugs to the pharmaceutical benefits scheme, at a cost of $1.4 billion;
- Funding for breast cancer screening; and
- Funding of $40 million for a whooping cough vaccine.
- The Budget also featured significant policy announcements in the area of science and innovation.
- The Government has committed to investing an additional $1.9 billion in Australia’s National Research Infrastructure over the 12 years from 2017-18. This will include investing more than $300 million into catalysing Australia’s space industry and the creation of the nation’s first Space Agency. $260 million will also be invested in developing a world-leading core satellite infrastructure and technologies, including better GPS and satellite imagery for business and regional Australians.
- Just under $30 million allocated to strengthen Australia’s capability in artificial intelligence and machine learning, including through dedicated PhD scholarships and additional funding to the Cooperative Research Centre Program work on AI and ML capabilities.
- Investment in Australia’s supercomputer infrastructure is also set to double to $70 million, while $4.5 million has been earmarked for encouraging women into STEM education and careers.
- The single most significant innovation policy reform was in the area of R&D, where the Government announced major changes to the R&D tax incentive that are estimated to save $2.4 billion over the forward estimates. In particular, companies with aggregated annual turnover of $20 million or more will be subject to an R&D premium that ties the rates of the non-refundable tax offset to the incremental intensity of R&D as a proportion of annual total expenditure.
- The marginal R&D premium will be the claimant’s company tax rate plus: 4% for R&D expenditure between 0 and 2% R&D intensity; 6.5% for R&D expenditure above 2% to 5% R&D intensity; 9% for R&D expenditure above 5% to 10% R&D intensity; and 12.5% for R&D expenditure above 10% R&D intensity.
- In a complementary move, the R&D expenditure threshold (the maximum amount eligible for concession) will be increased from $100 million to $150 million.
- In a big win for the start-up ecosystem, for companies with aggregated annual turnover below $20 million, cash refunds from the refundable R&D tax offset will be capped at $4 million annually, with a specific carve-out from the cap for clinical trials. This was a much better outcome than the $2 million cap which had previously been touted in the Ferris-Fraser-Finkel review of the tax incentive.
- The Budget also features two key measures around data governance:
- A new national consumer data right (CDR) will allow consumers and small and medium enterprises to access and transfer their data between service providers in designated sectors. Funding of $44.6 million will be provided to the ACCC, Office of the Australian Information Commissioner and CSIRO to implement the measure.
- The Government will provide $20.5 million over four years for the implementation of new data governance arrangements in line with the recommendations of the Productivity Commission’s 2017 report on Data Availability and Use. A data-sharing and release framework, backed by legislation, will be developed and administered by a newly established National Data Commissioner.
- The Government has also announced that it will be releasing a discussion paper that will explore options for taxing digital businesses in Australia in the coming weeks.
- There were few new announcements in the areas of skills, training and education:
- An additional $89 million over four years to the Transition to Work program. This is expected to deliver over 40,000 places to provide intensive and tailored pre-employment support to participants aged 15-21 who are at risk of long-term unemployment.
- The Government will also provide $96.1 million over four years to implement its response to the Independent Review into Regional, Rural and Remote Education. The funding will support young people from regional, rural and remote communities to transition to further education, training and employment. This will involve re-calibrating Youth Allowance thresholds to improve regional students’ access, increasing access to sub-bachelor programs, and additional places for bachelor students studying at regional hubs.
- ASIC will also be provided with $10 million to grant funding to initiatives aimed at enhancing female financial capability.
Missed opportunities – where’s the tax reform?
This Budget includes some measures that will go a small way towards driving the next phase of growth in the economy, but doesn’t go far enough. Where, for example, is the productivity-enhancing tax reform? Cutting taxes is not reform. All of the tax policy changes tonight – however worthy in their own right - are piecemeal.
AICD’s key recommendations from the Blueprint for Growth included a broad-based suite of reforms that we believe would do much to lift productivity growth and reduce the impact of damaging taxes. In addition to corporate tax reform and more investment in infrastructure, the Blueprint recommendations included:
- all marginal personal income tax rates be lowered;
- the nexus between negative gearing and the CGT discount be addressed in regard to its impact on housing affordability;
- Commonwealth spending growth be restricted to 1.5% in real terms; and
- the rate of the GST be raised to 15% and the tax base broadened.
There is still a window of opportunity, pre-election, for the Government to outline its vision for comprehensive tax reform – this chance is rapidly vanishing, but should not be lost.