Tough Changes Deliver Budget Surplus
|Download this Review of the 2012-13 Federal Budget analysis report as a PDF file.|
While positive in its own right, the Government’s promise to deliver a surplus in 2012-13 will come at a considerable cost to business. The Government is putting an emphasis on boosting consumption by households in the short-term but a number of measures, and in particular the abandonment of the commitment to cut the company tax rate, will undermine businesses’ ability to boost productivity and growth over the longer term.
In line with arguments put by Ai Group, the Budget contains a number of positives including in the areas of skills, education and training, in the commitment to a higher permanent immigration intake of 190,000, and initiatives to boost skills excellence and manufacturing innovation.
Ai Group will continue to emphasise the importance of investment and productivity particularly in the context of the pressures from the high dollar that are confronting many of our members. On the business tax front, we will seek to build bi-partisan support for sensible and long-lasting reform.
The Government remains committed to deliver a surplus in 2012-13 even as the deficit for 2011-12 has grown. There are strong arguments in favour of running a surplus in a year when growth is forecast to exceed 3 per cent and when commodity prices are at very high levels. A surplus will help ease pressures on interest rates and will shore up Australia’s already-strong fiscal position (certainly compared with those of other developed countries).
Revenue projections are down sharply compared with last year’s Budget, but not much changed from the mid-year Budget review (MYEFO) last November. The Government has revised down its economic forecasts slightly since then, to 3.25% GDP growth in 2012-13 and 3.0% in 2013-14. Employment growth is expected to remain weak, with the unemployment rate rising to 5.5% this year, from its current level of 5.2%.
Large revenue losses (down by $5.7bn in 2011-12) have meant equally large spending cuts have been necessary to achieve the surplus. Savings of$32.6bn are identified over the next four years, although only $4.4bn of these are anticipated for 2012-13.
The burden of these required savings will fall heavily on business. This will impede businesses’ ability to lift investment, productivity and employment in the near term. The cancellation of the one percentage point reduction in the corporate tax rate will save the Government - but cost Australian business - $4.7 bn over the forecast period to 2016. This is offset to a small degree by the tax loss carry back provisions commencing in 2013, which will save business an estimated $713mn in tax over the next four years. Other big-ticket savings in this Budget that will directly affect Australian businesses include a massive $5.4bn cut to defence spending, $353mn less for the Australian Apprenticeships Incentives Program and $400mn saved from the closure of the Green Buildings program.
In the short term, this reduced support for Australian business will exacerbate the current slowdown in non-mining private sector activity, investment and employment. The potential longer term effects on much-needed innovation and productivity growth are also a concern, especially given that unemployment is expected to increase, largely for structural reasons.
More positively, this Budget has met Ai Group’s recommendation that skilled migration be increased to 190,000. And education, training and workforce participation programs have been largely quarantined from the cuts (notwithstanding cuts to apprenticeship incentives).
The sharp fall in public spending this year will cause net public spending to detract from Australian GDP growth, knocking up to 1.0 percentage points off GDP growth in 2012-13. Even factoring this in, the Government expects the economy to grow by at least 3% in 2012-13.
While there are positive measures for business, the burden of revenue and spending measures in this Budget will fall disproportionately on Australian business. We note these particular measures for business:
- The one percentage point cut to the corporate tax rate will not go ahead. This will save the Government - but costing Australian business - $4.7bn over four years, including $1.2bn in 2013-14 and rising to $1.5bn in 2015-16,
- This will be softened somewhat by the ability of incorporated businesses to claim back tax losses against previous profits from 2013. This will be worth an estimated $713mn over four years, with most of it in the later years,
- There is a range of other changes to taxation arrangements both for business and individuals (see separate section below),
- Small business will benefit from previously announced tax deduction provisions for investment in plant and machinery assets of up to $6,500,
- Defence spending, investment and procurement will be hard hit, with $5.4bn cut from its budget over the next four years. This will adversely affect demand for Australian manufacturers and services that are geared to defence-related planning and needs,
- Skilled migration will be increased to 190,000, as recommended by Ai Group,
- Higher education, vocational training, education and workforce participation programs were largely quarantined from cuts in this Budget. Older worker participation was highlighted and general workforce participation will be encouraged by raising the tax free threshold for low income earners. (See below for more detail on skills programs),
- Adverse environmental program changes were largely limited to the closure of the Green Buildings program. This would have delivered $400mn to building investors over the next four years,
- Infrastructure investments that are already planned will go ahead, with additional funding found to fast-track national transport priority projects including the Pacific Highway upgrade ($2.6bn), the Torrens Junction rail project ($232mn) and the western Sydney intermodal terminal ($358mn).
A range of deferrals and cancellations of previously-announced tax reforms feature prominently in the 2012-13 Budget.
Business tax revenue is lower than Government anticipated in 2011-12 (see chart 1), as is all tax revenue. This reflects the weaker state of business turnover and profit relative to expectations. But even with this weakness, company tax revenue collected grew by 19.9% in 2011-12 and is expected to grow by another 8.9% in 2012-13 (in nominal terms).
This Budget has a major focus on tax measures, with several changes to business-related (and income) tax. The single largest business tax reform is the failure to implement the anticipated 1 percentage point reduction in the corporate tax rate (see summary above).
Other business tax-related revenue savings are also projected to come from:
- An extension of the GST compliance program for two years, that is expected to net $1.076bn in 2014-15 and 2015-16,
- Fringe benefits tax reforms for living away from home allowances that will cost businesses an extra $1.019bn over four years for employees living away from home,
- Changes to the carbon tax treatment of LNG and certain other gasses, which will now be captured within the carbon tax itself, rather than through the fuel tax rebate scheme. This change will be revenue neutral for the Budget but will affect how businesses account for their gas-related carbon tax liabilities.
For employees, tax changes and/or deferred reforms will include:
- As previously announced, there will be a big increase in the tax free threshold for low income earners as part of the carbon tax compensation arrangements,
- Scrapping of the standard tax deduction for income tax payers, worth $2.09bn over four years,
- Deferral of a higher concessional superannuation contributions cap, worth $1.46bn over four years,
- Introduction of a higher rate of tax (30%) on contributions to super funds for people earning more than $300,000 a year,
- Scrapping of the 50% tax discount on income earned from interest, worth $923mn over four years,
- Means testing of net medical expenses tax offset saving $370 mn,
- Changes to the tax offset for employment termination payments, raising $196mn over four years.
Chart 1. Company tax revenue
Source: Budget Paper #1 - Statement 5
Education, skills and training have, by and large, been left untouched in this Budget. Maintenance of funding in VET, and the newly-implemented demand-based higher education system is notable. Alterations to employer incentive arrangements for apprenticeships and traineeships will be monitored closely.
- Discontinuation of $1,500 standard employer incentive of existing workers commencement bonus. Completion incentive increased by $500 to $3,000.
- Occupations included on National Skills Needs List (NSNL) incentive payments remain unchanged.
- Saving of $353.6 mn over four years.
- The standard Employer Incentive commencement payment for Apprentices will be paid at six month rather than the current three month milestone.
- Saving of $47.8mn over four years.
- $50.3mn over four years to enable ASQA to ensure compliance to quality of the training system.
- $54 mn package investing in maths ands science initiatives
- $10.9mn to improve the quality of teacher training through innovative delivery of maths and science teaching programs for prospective teachers.
- $3mn national advisory and support service for Maths & Science teachers.
- $5mn Science Connection program to equip teachers to deliver inquiry-based science education.
- $20mn to establish Australian Mathematics and Partnerships Program to support innovative partnerships between universities, schools and other organizations to increase the number of students who go on to study these subjects at university.
- $2mn for Australian Mathematical Science Institute.
- $6.5mn for expanding the Science partnerships: Scientists and Mathematicians in Schools program.
- $2.4mn to support participation of International Science and Mathematics Olympiads.
- $4.3mn for a National Mathematical and Science Education and Industry adviser.
- Establishment of Centres of Skills Excellence in three strategic areas. Each Centre will receive $2mn per annum (co-contribution).
- Funding re-directed from National Workforce Development Fund.
- $29.8mn over four years for the establishment of MTIC.
- The MITC will create networks with major manufacturers, small and medium enterprises, industry bodies and research organizations to improve business performance through utilizing new technologies, business processes and technical knowledge.
- $29.6mn over four years for initiatives designed to increase the recruitment and retention of mature age workers
- Jobs Bonuses - $1,000 to each employer who employs an eligible mature age job seeker, payable upon 13 weeks of employment
- Expansion of ‘corporate champions’ initiative - include adding another 250 employers receiving tailored assistance to help with recruitment and retention of mature age employees, including information sharing and national seminars.
Changes to environmental measures and programs
The Government is tidying up aspects of the carbon pricing package and canning other policies that are now superfluous. Interestingly, forward estimates of carbon price revenue in 2015-16 are still based on Treasury projections of a $29 carbon price when the carbon tax converts to an emissions trading scheme. This is despite currently very low international carbon prices hovering around $9. Treasury notes considerable uncertainty. A lower price would hit the Budget bottom line, particularly since household tax cuts and benefit increases are fixed, but would also mean lower pressures on industry.
The previously announced Tax Break for Green Buildings will be scrapped, saving $405.2 million over five years. This will hit some commercial building operators, but is consistent with business calls to cut the tangle of overlapping and redundant climate policies.
The carbon tax will be amended to directly cover non-transport uses of compressed natural gas (from 1 July 2012) and non-transport uses of Liquefied Natural Gas and Liquefied Petroleum Gas from 1 July 2013. This change replaces the current approach, which applies a similar cost through reductions in fuel tax credits for those fuels, and is revenue neutral. Businesses using these fuels for non-transport purposes should not be financially worse off than under the previous treatment, but will need to get across the administrative implications.
Background: Budget bottom line holds firm
The budget has held firm to the surplus projected in the MYEFO, of $1.5bn underlying cash balance for 2012-13 (and $2.5bn for the fiscal balance), although the deficit for 2011-12 has grown larger, as was widely expected, due to natural disaster spending coupled with loewer than expected revenues. Revenue losses of $5.7bn relative to expectations for 2011-12 have required very large savings measures in order to maintain the surplus position. This move back to surplus will be the biggest single-year improvement in a budget balance in Australia’s history, with the value of the change in net spending equivalent to more than 3 % of GDP (see table 1 and chart 2).
As a proportion of GDP, net debt is expected to peak at 9.6% of GDP in 2011-12 and is anticipated to peak in absolute terms in 2013-14. These peaks are at slightly higher levels than previously expected, but remain low by international standards and will not threaten the Government’s AAA credit rating. Net capital investment by the general government sector (not including the Future Fund and other separate nation-building funds) will be negative $2.7bn in 2012-13, or $7.5bn lower than in 2011-12, due to reduced acquisition of defence assets and the sale of other non-financial assets. Much of this net asset reduction was already factored in at the MYEFO, but another $0.8bn has been cut.
Table 1. Key budget aggregates, Budget 2012-13
Underlying cash balance, $bn
% of GDP
Fiscal balance, $bn
% of GDP
Net debt, $bn
% of GDP
Source: Budget Paper #1 - Statement 2
Chart 2. Fiscal Balance
Source: Australian Treasury, Budget 2011-12, MYEFO 2011, Budget 2012-13.
Background: Government forecasts a slower economy
This Budget shows a slight deterioration in the expected outlook for Australia relative to the Government’s expectations in last year’s MYEFO (see Table 2 and figure 3).
This downgrade is partly because economic activity has slowed since November, and partly because the effects on the economy of the Budget itself will be negative. ANZ Economics calculated (pre-Budget) that the rapid shift from a deficit to a surplus in 2012-13 will take the equivalent of 1 percentage point off GDP growth in each of 2012-13 and 2013-14. That is, the headline growth rate will be 1 percentage point lower than it otherwise would have been. Government expects public final demand (that is, all spending by state and federal governments) to contract by 0.5% (a smaller contraction than 1.25% in the MYEFO) in 2012-13 and no growth in 2013-14.
Even factoring in this contraction in public spending, Government still expects headline growth to reach 3% or higher in 2011-12 through to 2013-14. This might prove difficult to achieve in practice, even with an upward revision to business investment expectations due to the mining investment boom. The Budget explicitly acknowledges the ‘patchwork’ nature of the economy, and particularly the difficulties faced by non-mining trade exposed sectors such as manufacturing and tourism at present. The forecasts also show a contraction in housing investment expected in 2011-12, with only weak growth in this key sector emerging again in 2013-14. And globally, below-trend world growth (under 4%) is still central to the outlook until 2013, with acceleration driven from Asia.
Table 2. Australian Government economic forecasts
MYEFO, Nov 2011
Budget, May 2012
Real GDP growth, % p.a.
Machinery & equipment
Non-farm GDP, % p.a.
Net exports, ppt contribution to GDP
Terms of trade, % p.a.
Employment growth, % p.a.
Unemployment rate, % (June Qtr)
Headline inflation (CPI), % p.a.
Wage growth (WPI), % p.a.
Source: Budget Paper #1 - Statement 2
This will leave mining-related investment and household consumption to carry Australian economic growth alone in the outlook period. Household consumption can be expected to lift going forward, on the back of the RBA’s rate cut in May, and the stimulatory effects of changes to family payments (such as the ‘schoolkids’ bonus worth $426.2m in 2012-13).
The major local risk in this outlook remains the labour market, with weak employment growth and a mildly higher unemployment rate expected during the outlook period. Internationally, significant risks remain in the form of Europe’s structural and fiscal problems, a slow recovery in the US and decelerating demand for commodities out of Asia. On the plus side, expected inflation and wage growth rates have moderated also, in line with softer demand pressures locally and globally.
Chart 3. GDP growth, actual history and Government forecasts