New government’s budget lays foundation for the future - 14 May 2008

With its sights set firmly on the future the Labor Government’s first Federal Budget met expectations and laid down foundations.

But will the long term approach have a similar long term life span in the collective mind of the public?

A PricewaterhouseCoopers team of specialist business advisers share their views.

Economy

PricewaterhouseCoopers economist and partner Scott Lennon says, “Despite the global credit crunch and likely US recession the 2008/09 Budget forecast a low impact on Australian gross domestic product (GDP) with it dipping slightly from 3.5 per cent in November 2007 to 2.75 per cent in FY09 then recovering to 3 per cent in FY10”.

He reasons that the strength of the GDP is a reflection of Australia’s economy largely decoupling from the US and the enormous commodity boom that has delivered benefits to corporate tax and exports.

The service sector is also performing well and the outlook for China and India continues to be strong too.

“Treasury is pointing to a soft landing for Australia. We all hope this is the case. But if the property sector softens as it has in the US and the inflation battle becomes a war, Australia is at risk of a bigger slow down,” Mr Lennon says.

Inflation

Arguably the populist Budget will prolong the fight against inflation in FY10 says PricewaterhouseCoopers economist and partner, Scott Lennon.

“Treasurer Wayne Swan was chasing a fast resolution to the inflation problem from 4.2 per cent at March 2008 to 3.25 per cent in FY09 and 2.5 per cent by FY10. But several announcements in the Budget make the task challenging and risk stimulating inflation,” he says.

For example, the $55 billion working family package is likely to be fully spent and Treasury says these families are under pressure.

Mr Lennon says, “Changes to the Medicare surcharge threshold is likely to drive up the Private Health Insurance (PHI) risk and the three new building funds should place even more pressure on construction contractors who will experience cost and wages growth.”

“Emissions trading will drive up the supply chain and energy costs creating inflation pressures and migration and higher mortgage costs will drive up the rent.”

“The Razor Gang arguably went a touch softly. Spending cuts were modest and new spending could prolong the inflation battle and see high interest rates as the norm in the short term,” he said.

Infrastructure

The Government’s $20 billion Building Australia Fund is a long term building block for establishing future infrastructure initiatives says PricewaterhouseCoopers partner Don Munro.

“Australia’s infrastructure deficits are well recognised and documented. The total shortfall of these projects extends well into the hundreds of billions,” Mr Munro says.

“The Building Australia Fund is a step in the right direction with a focus on filling gaps in state and private sector infrastructure spending such as the NSW M4 East; the QLD Bruce Highway development; and the Melbourne East / West Link.”

Mr Munro also believes Build Australia projects, which will be overseen by the newly created Infrastructure Australia will fund new developments according to national priorities.

“In the past, infrastructure initiatives were assessed according to state interests and frameworks. The new body is developing rigorous criteria that will rank projects based on a national priority scale.”

“Businesses should take the opportunity to work with Infrastructure Australia in establishing these benchmarks and determining how they can be best applied to new projects.”

Despite the significant funding injection provided through Building Australia, Mr Munro believes it simply solves part of a wider problem.

“Overcoming infrastructure deficits in Australia is not just about providing sufficient funding. Construction capacity constraint is also a key limiting issue,” he says.

“Projects nationally such as the ongoing iron ore development in Western Australia and the South Australian Olympic Dam expansion are absorbing massive resource levels”.

“While greater funding is easing the load, it is also increasing pressure on resource availability and adding to cost inflation.”

Productivity

The 2008/09 Federal Budget initiative makes useful investment in the long term productive capacity of the economy says economist and PricewaterhouseCoopers partner Scott Lennon.

“The economy has several handbrakes in the form of infrastructure bottlenecks and shortages in high skilled and low skilled labour,” Mr Lennon says.

“We have ship queues at commodity ports, constructors not investing in the plant as they can’t get staff, long delays to fill high calibre positions and the departure of high skilled talent to the UK, Middle East and Asia.”

“Extra migration, the Building Australia Fund and new education capital spend will boost Australia’s long term productivity but in FY09 it will offer minimal improvement in productive capacity”.

Climate Change

PricewaterhouseCoopers Climate Change Services director Sean Lucy says, “The 2008/09 Budget reinforces that climate change is now cemented into the Government’s economic thinking, but the devil will be in the detail”.

“The Budget commits the Government to significant strategic investments to help prepare Australia for climate change, with major programs for new technology and infrastructure.”

Mr Lucy adds, “This budget works across all levels of the economy, making funds available to drive action on climate change from households’ right through to big businesses”.

“Some questions still remain about the implementation of major projects. Conventional desalination technologies can come with significant carbon costs and the Government’s efforts to manage these costs will be watched closely.”

Mr Lucy believes that climate change projections indicate that additional stress will be placed on existing and new infrastructure assets.

“A key challenge for Infrastructure Australia will be to deliver infrastructure projects that will meet these new conditions by being climate change ready,” Mr Lucy says.

“The 2008/09 Budget signals a big change is on the way with the Government committing significant resources to the design and implementation of the emissions trading scheme over the next three years. There is also a commitment to integrate the emissions trading scheme into the complete Australian taxation review.”

Water

“There was no discernible shift in the direction of water policy in the 2008/09 Federal Budget,” says PricewaterhouseCoopers partner Craig Fenton.

“The funding commitments provided support for established reforms. For example, environmental water repurchase is still very much an option from willing sellers but there is no provision for compulsory acquisition of water entitlements.”

Of the ‘new’ $12.9 billion 10 year national water policy framework which encompasses initiatives in the urban and rural sector, only $1.5 billion was new funding according to Mr Fenton.

“There is also the question of the implementation of the package in terms of responsibilities between States/Territories and the Commonwealth. It is still to be developed.”

“Generally these arrangements would be expected to be negotiated through the usual COAG process,” he says.

Small business

It’s ‘business as usual’ for small business according to PricewaterhouseCoopers partner Gregory Will.

With no support for small business growth into export markets, Mr Will says there is no incentive for small business to be more competitive in Australia or overseas.

“The 2008/09 Budget did not encourage an Australian entrepreneurial spirit. The $700m Commercial Ready program has been cancelled and there is no differentiation between small and big businesses.”

“Where is the encouragement for small business through incentives and relief?” Where is the incentive to invest in small business?” he asks.

“When starting up a business it is difficult to obtain finance. Small businesses need support and encouragement to take risks and be competitive.” Mr Will says.

Personal tax cuts

The Government has delivered on its election promise to cut income tax for low and middle income earners, according to PricewaterhouseCoopers tax partner Paul Brassil.

“The majority of Australians will share in $46.7 billion worth of tax cuts over the next four years. The new Government’s Budget has primarily focused on the lower tax brackets,” he says.

Over the next three years, the 30 per cent tax threshold will be raised from $30,000 to $37,000. Concurrently, the 40 per cent tax rate will be fall to just 37 per cent by 1 July 2010.

“However, workers paying the top marginal rate of 45 per cent and earning $180,000 or more will have to wait until at least 2012 before seeing any tax relief,” Mr Brassil says.

“The Treasurer has conceded that some Australians are being asked to shoulder a greater financial burden than others.”

Family Trusts

The Government’s decision to reverse two provisions governing family trusts operated by small businesses is a surprising move says PricewaterhouseCoopers partner Paul Brassil.

“The Government’s re-introduction of these limitations will affect the ability of small business operators to keep their enterprises in family hands.”

“Changes to the definition of ‘family’ in the family trust election rules will deny certain family members such as great grand children the opportunity to share in the benefits of the family business”.

“The previous rules, amended just 12 months ago, solved a long standing anomaly regarding businesses run through family trusts.”

“The ‘new’ rules will likely throw family trust elections into turmoil and create a barrier for small business owners from passing on their businesses to future generations.”

Superannuation

“There were no immediate surprises,” says PricewaterhouseCoopers partner Mike Forsdick of the changes to superannuation announced in the 2008/09 Federal Budget.

“It has been two years since a major overhaul of the super system. It is too early to do it again.”

“Superannuation will be part of the tax review,” Mr Forsdick says but cautions that proper consultation needs to take place to ensure fairness.

“The review will not affect the taxing of super benefits, although it may change the tax arrangements of contributions and earnings.”

Mr Forsdick adds, “The Budget was a vehicle to confirm recent policy initiatives such as the tax free lump sums to the terminally-ill which has been back dated effective from 1 July 2007”.

Employee Share Schemes

The 2008/09 Federal Budget may have given clarity around employee share plans but PricewaterhouseCoopers partner John Fauvet says, “This is still a complex area that would benefit from a ‘root and branch’ review”.

While there has been clarification around the amendment of returns to achieve a better outcome, Mr Fauvet says this could only have been done appropriately in rare circumstance anyway.

“This year’s Budget removed a technical anomaly. No longer will there be a situation where double tax could arise.”

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