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While Australia has experienced a period of rising inflation – the highest in forty years – along with the increasingly high cost of living, limited access to talent and persisting supply chain issues, inflation seems to be subsiding. Current data from the ABS confirms inflation has passed its peak.
The Federal Government this year had three priorities – cost-of-living relief, growing the economy and ensuring Australia’s stability against international economic instability.
This year’s Budget is the first in 15 years that the Federal Government has delivered a surplus with Labor reaching a surplus of $4b in 2022–23. This is thanks in large part to significant revenue from income tax, record low unemployment of 3.5 per cent, a lift in wage growth along with the return of migrant workers to Australia’s shores and a tax revenue windfall from mining royalties. The deficit is then forecasted to increase to $13.9b for 2023–24, reaching $36.6b for 2025–26, before declining to $28.5b for 2026–27 – smaller deficits than initially forecasted in October.
However, with government debt currently at $548.6b, it’s a short-lived surplus. Future government debts are expected to blow out to nearly $1 trillion by 2027 due to the rising costs of NDIS (with the Government proposing sweeping reforms for the regime and lowering its growth rate in future years), health, defence spending pressures and the ballooning cost of aged care – including funding for a 15 per cent wage boost for aged care staff, decided by the Fair Work Commission last year, revealed to cost $11.3b over four years.
Forecasted federal debt interest payments have fallen by $10b over the four-year forward estimates since the Government’s interim Budget. However, the debt interest is the second-fastest growing spending area, behind only the NDIS, with interest payments being $111.8b throughout this fiscal year and the next four forecasted years combined.
But is the Government pulling in enough tax revenue to fund these concerns? With an overreliance on income tax alongside an ageing population, the Government must look to other areas like business to receive revenue – a structural budgetary issue that was first reported back in 2002 in the first iteration of the Intergenerational Report. Whether Australia is politically ready for that tax conversation remains to be seen.
This Budget amended the Instant Asset Write Off, capping it to businesses with turnover of $10m or less (down from its previous $50m threshhold) and the loss carry-back scheme was not extended. While the savings from reducing these COVID-19 concessions or allowing them to expire will in effect strengthen Australia’s ability to withstand economic shocks, some of these schemes – like the loss carry-back scheme – are already law in other countries.
Australia has used such schemes in the past to encourage investment, and while the COVID-19 pandemic has officially ended, we’re still dealing with the ramifications of it. Maybe maintaining incentive schemes like the loss carry-back scheme is actually good business.
Pre-Budget, we saw the Government announce changes to the superannuation tax threshold for high income earners, and a focus on multinational tax transparency, alongside a consultation paper outlining changes to the Thin Capitalisation regime. While these are much needed changes to ensure large corporates are paying their fair share of tax, the focus on MNEs may create challenges when it comes to encouraging foreign investment into Australia. Essentially, businesses will need to be complying with additional hurdles in Australia while also managing competitiveness with a high corporate tax rate.
What we need now is a balance of both supporting industry and supporting government revenue. Our corporate tax rate is already high. While there’s global appetite for tax reform (especially with Pillar Two of the OECD’s global minimum corporate tax rate of 15 per cent on the global agenda) we need a considerably broader conversation on tax reform if we’re trying to both compete globally and fund future spending requirements.
Disappointingly, the R&D tax incentive was not mentioned at all tonight – a significant pillar of encouraging investment into Australia. Similarly, the Patent Box was not reintroduced, which much like the loss carry-back scheme, is a feature of many other countries innovation agendas.
Even though COVID-19 is mostly in the rearview mirror, the impacts around increased costs, supply chains and access to talent is still an issue felt around the country. While the population has increased and we’ve seen an influx of migrants return to the country, finding the right people to fill roles is a challenge many businesses face.
Add to this significant energy price increases, wage growth and the ramifications of inflation, many businesses are facing financial difficulties and insolvency at an alarming rate – particularly in industries like building and construction. Larger, cash-rich companies will be able to ride this out. With the Government’s Small Business Energy Incentive, and investment in Australia’s sovereign capabilities by way of the previously announced $15b National Reconstruction Fund and $40b in renewable energy initiatives to make Australia a ‘renewable energy superpower’, hopefully industry, SMEs and mid-sized businesses can too.
The Government has been clear that this Budget’s main focus was to cautiously mitigate the risks of a possible recession and ease impacts of inflation. Real budget repair and expenditure will be a focus for future budgets, along with reducing the ballooning national debt. Let’s hope they’ve alleviated enough of the cost pressures facing millions of families and businesses in the short term.
