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.

Easing the burden of natural disasters

Australia has seen its fair share of natural disasters this summer. Following the devastation caused by the flooding across Australia and Cyclone Yasi in northern Queensland, it is important for affected communities to rebuild and recover as soon as possible. The government’s responsibility is to assist individuals and businesses in this process.

A good way to speed up the recovery of communities is the introduction of an investment allowance for businesses impacted by the floods or the cyclone. This kind of incentive would encourage people to rebuild their businesses quickly and subsequently, rebuild the economy. The success of previous temporary investment allowances, such as the one used in 2009 during the global financial downturn, suggests this type of financial incentive is effective in kick-starting business activity when the economy needs it most.

For the long term, in light of this year’s natural disasters, and those in previous years (such as bushfires and storms), it is important that the government puts a plan in place to manage the unfortunate and unexpected (though not unpredictable) costs that natural disasters bring.

If the government sets aside funding (through cutting costs or delaying projects), Australia can be better prepared to rebuild and recover quickly, whatever nature may bring.

See our 2011-12 Federal Budget submission for more.

Increasing taxes: still not the answer...

As I unfortunately predicted in my blog last week, the federal government has proposed the introduction of a flood levy on taxpayers to cover the costs of rebuilding ravaged infrastructure in flood affected communities, in an effort to keep its promise to return the budget to surplus by 2012-13.

As I alluded to last week, the most effective way to meet Australia’s increased spending requirements is to defer the date of returning the budget to surplus – it is important to have a real-time sense of perspective about budget deficits and public debt. When successive governments have been trying to reduce the tax burden on Australians over the last decade, the last thing we need is a new levy.

Australia’s financial and risk management strategy should involve controlling expenditure and having the capacity to fund unexpected events or emergencies. While the flood crisis was an unexpected natural disaster on a massive scale, it was not unpredictable.

The question Australians need to ask themselves is: what can we do to ensure this country is able to deal with crises of this scale in the future? Will the flood levy set a precedent for future ‘one-off’ taxes?

The Institute has also published a media release on this issue.

Forget about tax increases – send in the ‘razor gang’ instead

As the full extent of the recent flood crisis across Australia begins to emerge, attention is turning to the extent and cost of the long-term devastation and ruin.

Estimates vary, but even conservative economists are suggesting that the floods could dampen Australia’s GDP growth by a full percentage point in the year ahead. If that’s correct, it would have a significant impact on tax revenue collections because the profits of many businesses will be negatively impacted in the short-term. On top of that, it is estimated that the floods could cost the government a minimum of $5 billion over the next three or four years. Some are even suggesting the final number could be as much as $20 billion.

In light of this new and unexpected financial burden, calls are increasing for the federal government to revisit its plan to return the budget to surplus in the 2012-13 fiscal year, and to push that timetable out so that the immediate focus remains on rebuilding communities and public infrastructure. Some knee-jerk responses that have already been put forward include increasing the current 1.5% Medicare levy. While that may be an easy option for the government, I don’t think that’s the right policy answer.

I suggest a more prudent approach would be to review all of the major federal government agencies’ spending programs with the objective of finding efficiency gains and expenditure cuts. When this kind of exercise is conducted properly, big dollar savings can always be found, and that will go a long way to plugging the financial hole.

Sending in the ‘razor gang’ to find cost savings is always very difficult to do, but in challenging times like these, it’s the right answer. Following the personal loss and devastation facing communities across the country, the last thing Australia needs is to increase the tax burden on taxpayers at a time when we are trying to move in the exact opposite direction.