A solid budget, but a reckoning is coming on international borders

Therese Raft

Welcome to Navigating the New Normal – Grant Thornton’s podcast exploring trends in business and the marketplace.

I’m Therese Raft and today I am joined by Vince Tropiano, Corporate Tax Partner in our Sydney Office and Phil Coorey, Political Editor at the AFR. We’ll be reflecting on last week’s Budget and Budget response – and whether this helps to shape a new Australian economy.

So welcome Phil and Vince!

Phil Coorey

Thanks, Therese.

Vince Tropiano

Thanks very much, Therese. Good to be here.

Therese Raft

Now, Vince and Phil. We all watched the Federal Budget delivered as it happened last week. What were your first impressions, Phil?

Phil Coorey

My first impressions were it was a budget that didn't really have a broad theme to it. It was more a list of measures designed to combat various political and economic challenges. So, I guess if it was trying to do one thing, it was trying to drive the unemployment rate below 5%. So it was a continuation of assistance measures, tax assistance measures to keep business investing. There was a hand out for the low and middle income earners, ostensibly badged as a stimulus measure but probably more a political fix as much as that. And then there were things like the response to the Aged Care Royal Commission which, quite separately from anything else, had to be done anyway because the Prime Minister had instigated the Royal Commission into that. So, I guess you could argue about how it was paid for – he decided not to go for a tax in a deficit/debt budget, rather just take it off the bottom line. But other than that, it was rather unremarkable, I thought.

Vince Tropiano

Look, probably similar to Phil. I thought they're a bunch of interesting bits but I’m not sure that there was an overarching theme. But some of the things that…the focus on the digital economy I think that’s probably something that's welcome, and some of the concessions and the extensions of concessions, sort of dealing with COVID hit sectors. Acknowledging the COVID issues are still around albeit there seemed to be quite a quite a positive spin on it, in terms of we're doing so well. But it was probably, I guess we were expecting something akin to an election budget or something close to it. There might have been a few things similar to that in it.

Phil Coorey

Yes, it was. Look, it was, you know, I think it's a dress rehearsal for an election budget. I mean, the headline for that budget should have been “no one was harmed in the making of this budget”, so it telegraphs the government's political intent. And that is, if they don't do another budget, if they do do another one; it will be like this. They don't do another one; this will be it. By the way, they're not going to hit anyone with the new tax or anything else this side of the election.

Therese Raft

Now, it was quite clearly a budget that was spending money to make money. And that's not usually what we have come to expect from a Liberal Government, is it?

Vince Tropiano

Well, you know, looking at it with my tax hat, there were a few things in there which I think we certainly approved off. Some of the tax concessions around extending right off periods and the loss carry back measures which were brought in as part of COVID support. And from my mind, there's some of those things of things which probably should be there on an ongoing basis. Certainly things like loss carry back operates in a number of other jurisdictions, and it works well there. So I think from that side of things I was quite happy to see that there was money invested in those areas.

Phil Coorey

Yeah, I don't think that they were just spending money for the sake of that. It wasn't just sort of “free money” being sprayed around. The money they did spend was targeted. So, you know, all those measures Vince just mentioned, the temporary expensing, loss carry back, stuff like that. So they are measures designed to stimulate economic activity. It's not just giving people money ala the John Howard days, you know. So there is, I guess, some method to it = that it's supposed to generate sufficient economic activity. The government's basic point is that before the pandemic, when they got the budget back to balance, the turning point came when they got the welfare level to the lowest it was in 30 years. And the difference in income tax receipts and the drop in welfare payments did more to fix the bottom line than anything else. So that's the sort of sweet spot they're aiming to get to again. And that's why they’re going for a sub 5% unemployment rate. But at the end of the day, that will be helpful, but it won't be enough. And somewhere on the other side of the election they'll have to do more in terms of the debt and deficit than just having a low unemployment rate and hoping it sort of magics its way back towards the black.

Therese Raft

Now, there were a couple of initiatives they announced in October last year, and one of them was the MMI. And interestingly and perhaps surprisingly, for some people, there was nothing explicit about the MMI in this particular budget, despite the fact that all the funding rounds and the road maps were released well before last week. Are we still moving towards a modern manufacturing economy, or are we now moving towards a digital economy?

Phil Coorey

Well, both. The trouble is, when they announced the MMI, they also did other measures. In the October Budget budget they got accused of ignoring women because these were male dominated sectors – and this is how stupid politics can be – so if you notice in this budget, the sectors that got all the money and attention was the care sector; aged care, mental health, disabilities. A: because they needed it, but B: because they’re female dominated. So it was almost the government saying “we have to balance out what we did in October”. But having said that, I mean this stuff in October is still hanging around. But as Vince mentioned at the start, I think one of the understated aspects of the budget were the moves on the digital economy, and also the extension of that – the tax treatment changes, and stuff to the lure the so-called “best and brightest” here. They're non-monetary measures that don't require a lot of money. They’re more regulatory and legislative changes. But they were fairly strong signals of intent by the Government, if you like, in terms of where our economy is going, and where it needs to adapt.

Vince Tropiano

And probably picking up on that, I think the Patent Box is one of the examples of what could be used to support both modern manufacturing and a digital economy. And that's been tried and is used in a number of other jurisdictions. UK being one. Interestingly enough, it hasn’t had a huge take up in the UK in terms of number of companies that are taking advantage of the Patent Box. So we need to look over the detail in terms to make it more widely acceptable. I mean, at this stage, it's limited to two particular sectors. But certainly I think it is something that should be a benefit and something that we should look at establishing more widely. And I think that will work with both supporting manufacturing and supporting growth of the digital economy. And hopefully kicking along the Australian economy and Australia's position in the digital world. But to my mind, I think sometimes the MMI was a reaction to what was happening with COVID in terms of supply chain and the like. We needed to get back to building things here in Australia and maybe just in terms of the sentiment on last Tuesday around things are much better than we thought, allowed the government to focus on some other areas rather than going back to that particular pocket.

Therese Raft

The Government – their wheelhouse really is business and competitiveness. And there were no mentions last week of changes to the corporate tax rate. However, we do have one of the highest corporate tax rates in the world and I don't think it was that long ago that the OECD called us out for our two tier tax system So in a post COVID world, are we competitive?

Vince Tropiano

I think that there's going to be a few interesting changes. They're looking at what Joe Biden is trying to do in the US, and pushing for global minimum corporate rates is going to play a big part in that. I mean, we've been talking about making corporate rates more competitive for… since puss was a kitten. But I think that if there is a push towards increasing the corporate rates to a minimum, then that is going to make our life easier because that brings us more into the competition game. I still think there's a long way to play before that happens. Because there are a number of countries whose economy is built on a competitive tax rate structure. You know, Ireland and the like. And there's going to be a lot of pushback before something like that happens. And if it does, I don't think it's going to happen any time soon. So we still need to be looking at how we can be more competitive in the global environment.

Phil Coorey

Yeah, I agree with Vince. I don't see any move on company tax for a long, long time. For predominantly political reasons. A: when the government tried to touch it last time they got burnt badly by a populist campaign against it. So now we went out with this two tiered system. Twenty-five percent (25%) for businesses up to $50 million turnover. Thirty percent (30%) above. One of the arguments that the advocates of the tax cut used to quite passionately, was the huge corporate tax cuts that they enacted in the UK and in the US – we would be left behind. That argument’s now disappearing because both those Governments are hitting businesses again with taxes – as you mentioned, Biden is putting them back up. So you know, the sort of advocates can't really point over there. The other thing, and the main thing is money. So they're very expensive as we know. But to sell a corporate tax cut political, you have to marry it as part of a tax reform package. So the best way to get it past people, get it past the sort of populist, big end of town type argument, is you marry them with a set of income tax cuts as a broader reform package. And as we’ve seen, the Government's already put about $300-and-something billion into the stage one, two and three income tax cuts. So I think they missed the opportunity. They should have – probably when they did those income tax cuts – married them with a company tax cut and sold it was a package. But if they were to come up with the company tax cut now there's just no capability to offer further income tax cuts than what is already out there. So I think the opportunity's been missed for quite a long time, to be honest.

Vince Tropiano

Having said that, we're still going to have some challenges in dealing with tax rates in Asia, for example, where we’re nowhere near is competitive. It does pick up in the US and the UK. As you say Phil, we’re still going to have some issues dealing with the Singapore’s of the world, and all the rest. And where a lot of the manufacturing takes place now, certainly our environments, where they have fairly low tax rates, either in Asia or in Eastern Europe, and the like. So if we're trying to build our manufacturing, trying to support Australian industry, it's still going to be a tough sell with the tax rates which we have.

Phil Coorey

Absolutely, I have no issue with that whatsoever. I just think they’ve just blown the opportunity to do it politically and economically for quite a while. And you can sort of see the emphasis they’re now putting on things like “best and brightest” schemes to attract people here. And then we went to the Patent Box, which gives a corporate tax cut in a very limited sense. So I reckon we're going to see more of those sorts of measures rather than a global attempt to cut the tax rate globally.

Therese Raft

Now, as you both kind of alluded to, Australia does not exist in a bubble. So I did want to touch on the elephant in the room, which is borders. Which apparently won't be opened until mid-2022 at the earliest. So outside of tourism, which we know is very hard hit from closed borders. Is this impacting business? Based on how our economy is going? It doesn't seem like it is.

Phil Coorey

Look, it's going to. Gladys Berejiklian says New South Wales has been losing $1.5 billion a month to the closure of international borders. And we've seen in recent days…I know in our paper the Financial Review… we're just talking a second ago about attracting the “best and brightest”. I've been absolutely inundated with emails and calls from skilled migrants already living here. People in IT, global communications, science and so forth who want to leave because they’re here – but a lot of them are sort of young – sort of thirties and forties – they’ve got kids, and they haven't seen their parents or their families in the UK and other countries for already for a year. And on budget day, when they looked at the budget and realised it may be another year before they could do that – it's really quite a big thing inside the expat community, inside that that high skilled community. And I’ve had a lot of contact with people talking about…some have left, some have decided to go, and others are weighing up the decision. They’ve got Facebook pages where they chat amongst themselves. So I mean, that's not a huge thing, but it's significant. You know who's going to come here if you know you can't leave. The mobility is a big thing for global companies. And I spoke to the Premier of New South Wales a while back, and there's no argument they’ve done a very good job in New South Wales in terms of suppressing, you know, the Coronavirus without doing locked downs and so forth. And she said that they’ve had a lot of interest from people abroad wanting to relocate to New South Wales. But if the borders stay shut, those opportunities are being missed. So I think domestically we can thrive amongst ourselves. But there will be a reckoning if they can't get them open.

Vince Tropiano

I was reading your stuff over the last couple of days, Phil. And I was reflecting on it – and I walk into the office and can see examples of that because we're suffering a shortage of skills – skilled workers across the industry. And I know that's a big issue because we rely on people coming through from overseas to work in just our environment. I imagine there's a lot out there that are quietly suffering as well. And I can't see this is an area where people will… we will be suffering for the lack of getting talent in the country and losing the talent which we have, for sure.

Phil Coorey

I mean, the Prime Minister's – not name dropping here – but I was speaking to him just a day before I'm talking to you and he's very conscious of it. But he really needs the tick off from the medico’s, but he wants to get it going again. He believes – and he's trying to push the medico’s that once you're vaccinated you’ll be able to travel domestically and then the next step, will be to travel internationally to Green Zone countries. So he’s going to do it. He says it’s not a binary proposition. It’s not like they'll just be shut one day, open the next. They want to get it going in increments with business travel, with a couple of States pretty ready to go on international students. They're talking to the universities about the uni's paying for quarantine and things like that. So they're mindful of it. But they also have to be mindful of the political and medical consequences if you get it wrong. So that’s the sort of situation we're in.

Therese Raft

Now, we are heading into an election and it needs to be held… I think it's no later than May next year… so there is enough time to squeeze in another Budget. Potentially. What would you put your money on Government announcing between now and when we head back to the polls?

Phil Coorey

Nothing nasty. Nothing that’s going to scare people off. This Government will go to the election with, you know, we're going to grow the economy to pay for things, right? So it will be low taxes, things that generate income, things that generate jobs. So I suspect the next Budget, if there is another one, that will be pretty much a mirror image of the last one. They may be able to point to a balance or a balance in the medium-term by the end of the decade, which would be a light at the end of the tunnel sort of thing. But I suspect it will be pretty much steady as she goes. Labour has learned its lesson. They're not going in just promising to spend the world, like they did last time. We saw that with Albanese’s Budget Reply speech. He announced a $10 billion future fund for housing, but it's an off Budget scheme. It's not off the bottom line as such. So I think people will sort of see economic caution from both. The spending will probably be reined in. There's a consciousness now that has to be addressed of some stage, but you won't see measures actually combat that in any meaningful sense until after the election.

Vince Tropiano

I think that's right. You know my mind – it's always election budget support for voters. So no new taxes, some more concessions for business where they can be. I think, probably as you alluded to, the focus on the existing debts – that probably won't be as big a deal. That will be “we're still working through all our challenges, but we will have a surplus in X number of years”. But it'll be a fairly – it should be a fairly soft landing in terms of what might be announced in the Budget.

Therese Raft

Well, Phil and Vince, thank you both so much for your time.

Phil Coorey

Thank you

Vince Tropiano

Thank you

Therese Raft

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