Budgeting beyond the boom

As the investment phase of the mining boom ends, we look at what Australian business needs from the budget to carry the economy forward.

All eyes will be on Canberra next month for one of the most pivotal budgets of recent times. It comes against a backdrop of economic and political instability as ructions within the Liberal party continue to grab headlines.

The Government and business recognise hard decisions need to be made as Australia transitions through the third phase of the mining boom. But will the Government hold its nerve in the face of dissent?

Treasurer Joe Hockey’s first budget, in 2014/15, outlined a range of much-needed saving measures but was roundly seen as a sales disaster.

Deloitte Access Economics partner Chris Richardson told the ABC’s Four Corners: “The Government had the courage – and credit to them – to attempt budget repair in Australia (last year). It turned into major political difficulties.” 1

This year, Hockey’s task is even trickier. The need to rein in spending is greater than ever, but several planned reforms have been scrapped or defeated.

“The politics of this (budget) are a disaster,” Richardson said. “Any political advisor would now be telling the politicians ‘don’t annoy the punters because you’ll lose their votes’ but at some stage this problem still has to be addressed.” 2

Prime Minister Tony Abbott’s recent talk of a boring budget 3 does not bode well for those hoping to see fiscal belt-tightening. But business and industry groups have urged the Government to hold the line on tough reforms in pre-budget submissions. In doing so, key groups – the Australian Industry Group (Ai Group), the Business Council of Australia (BCA) and the Australian Chamber of Commerce and Industry (ACCI) – have stressed the importance of communicating the need for change to the public; something they feel has not been done effectively.

The BCA writes: “The starting point for community support for this program of reform will be to properly explain the compelling need for action.” Echoing that sentiment, Ai Group underlines the need to “build understanding in the broader community.” 4

In simple terms, the first step to fixing a problem is to get the public to recognise that one exists.

To put the current situation in context, the BCA points out that when the GFC hit in 2008, Australia was well positioned to weather the storm with a $20billion surplus and no debt. Today the country is carrying a $40billion deficit and net debt that is 15 per cent of GDP, leaving us exposed to future shocks in uncertain times. Debt is growing each year, indicating a structural deficit, not a cyclical blip that will right itself. And the outlook is not promising. GDP growth is below trend, national income is flat, employment growth sluggish and unemployment on the up.

The reality is – with falls in iron ore and coal prices – Australia can no longer rely on terms of trade windfalls to deliver the economy back to surplus as it has done in the past. The way forward is to cut unsustainable spending and invest in areas that will boost productivity and skills.

The BCA calls for a major “renegotiation of what governments (taxpayers) can be expected to pay for,” with health and aged pensions first up for review. Greater privatised service delivery and user-pays options should be examined.

Industry groups agree this budget should be about repositioning the economy to allow small and medium business to flourish as mining investment contracts. As Treasurer Hockey said in March: “The biggest driver of job growth in the future unquestionably is going to be small business.” 5

Ai Group calls for a focus on incentives for business to innovate and invest and a greater role for Government in helping SMEs access international markets. 6

The Abbott Government has signed several Asian trade deals in the past 12 months and both Ai Group and ACCI want the Government to invest in proactive schemes to tell businesses how they can benefit.

Domestically, ACCI also wants the Small Business Entity Test threshold lifted from $2million annual turnover to $3million (and to further investigate raising it to $5million) to allow more businesses to access tax concessions and simplified reporting. ACCI also calls on the Government to implement the Henry review recommendation that small businesses be able to write off up to $10,000 in new assets each year. 7

On more general tax issues, ACCI also urges the Government to commit to a maximum tax-to-GDP ratio of 23.9 per cent, with indexed thresholds to eliminate bracket creep. And business groups are pushing to see a 1.5 per cent levy on larger businesses dropped now the Paid Parental Leave scheme has been scrapped.

The construction sector has seen mixed blessings in the past year, with slowed mining investment, but the strongest growth in residential building since the early 2000s. Public sector infrastructure investment has fallen and business is urging targeted spending. Certainty at State and Federal levels is vital to avoid a repeat of Victoria’s on-off East West Link. Ai Group and ACCI recommend independent bodies such as Infrastructure Australia play a central role in selecting and prioritising projects to stop them becoming mired in partisan politics.

1 M Wilkinson and K Michelmore, ‘House of Cards’ Four Corners, ABC-tv,16 March 2015.
2 Wilkinson and Michelmore.
3 Staff writer, ‘Tony Abbott says Federal Budget in May to be ‘pretty dull’’ news.com.au, 18 March 2015.
4 Business Council of Australia, BCA Budget Submission 2015-16: A 10-Year Plan For Growth, February 2015.
5 Joe Hockey, Intergenerational Health and Wealth, Q&A, ABC-tv, 16 March 2015.
6 Ai Group, Ai Group Submission to the Federal Government’s 2015-16 Budget, February 2015.
7 Australian Chamber of Commerce and Industry, 2015-16 ACCI Pre-Budget Submission, February 2015.

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