Government charts its course towards a return to Budget surplus

Canberra was buzzing yesterday as the Gillard Government handed down the 2011-12 Federal Budget to an audience of stakeholder groups, influencers and media commentators.

The 2011-12 Budget has unrealistically high expectations of the commodities boom to deliver major upward revisions to tax revenues over the four year period of the forward estimates.

One component of the projections that I am cautious about is our return to surplus in 2012-13, which has been built on quite optimistic assumptions about the strength of our non-mining sectors over the next two to three years. I think there is currently some 'softness' in the manufacturing, services and retail sectors that might continue for the next two years and beyond.

Overall, the budget contained very few surprises or measures that the public were not aware of ahead of Budget night.

Some of the most interesting announcements related to:

• Changes to the tax laws to provide incentives for private sector investment in infrastructure
• Reforms to the way in which fringe benefits tax is applied to salary-sacrificed motor vehicles
• The abolition of the low income tax offset for non-earned income distributed to minors.

All of these measures have policy merit in different ways and should therefore be supported.

One measure absent from the Budget was the creation of a permanent natural disaster relief fund, which is what the Institute had recommended to the government in order to alleviate the need to implement one-off taxes like the recently legislated flood levy. The government still has an opportunity to consider this advice ahead of the October tax forum.

 

It’s that time again; the federal budget is nearly here

There’s little over a week to go until the federal government opens up the nation’s accounts for everyone to see for yet another year. The federal budget is due to be handed down by the Deputy Prime Minister and Treasurer, the Hon. Wayne Swan MP, at 7.30pm on Tuesday 10 May in Canberra.

Expert commentary has already begun to reveal the high points of the story that is likely to be told on 10 May. The recent natural disasters across Australia will have a twofold impact on the budget: firstly, tax revenue collections will be down on expectations because many businesses will not have made the sort of profits they would have expected. Secondly, the federal government will have to meet unbudgeted costs associated with the rebuilding of lost or damaged infrastructure across various states.

As you are aware, the Prime Minister announced in January that from 1 July this year, a temporary one-year flood levy would be applied to all taxable incomes above $50,000 for the year. The levy is intended to help offset some of the infrastructure costs that will be borne by the federal government.

In the Institute’s budget submission earlier this year, we put forward the argument that we should avoid resorting to one-off tax increases to meet unplanned – but not completely unexpected – costs associated with natural disasters such as floods and bushfires. We argued the case for the creation of a permanent natural disaster relief fund, so that one-off tax increases can be avoided in the future.

We also recommended the government consider the introduction of a special investment allowance for disaster-affected businesses to encourage them to reinvest in plant and equipment damaged or lost during the natural disasters. While this would cost money, if calibrated well it could effectively pay for itself by encouraging more business activity and profits, which would lead to more taxes being paid.

There has been other speculation emerging in the last few days about what may or may not be in the budget. Two things appear likely:

• A crackdown on the tax rules that apply to trust distributions to minors
• Another attempt to put in place a phased means-testing of the private health insurance rebate for those earning more than $75,000 per annum.

The speculation will no doubt continue up until budget eve. But in the end, the only thing that’s certain is this: The Treasurer’s announcement on 10 May will only start the process – of course, Parliament will be required to debate and approve the proposals when it comes together in a couple of weeks’ time. We can all enjoy the political fireworks.
  
The Institute will keep you informed of all the latest information relating to the federal budget. Check our website for up-to-date information.