QTPA Member Alert | COMMENT ON FEDERAL BUDGET 2012-13 (16/5/2012)

COMMENT ON FEDERAL BUDGET 2012-13

“Business Pays for Back to a Black Budget”

As expected, the Federal Treasurer delivered a pretty tough Federal Budget with the scrapping of the proposed corporate tax cut and the cutting of a number of programs for industry at its heart.

While there were some significant victories, especially around training, skills and the maintaining of the R&D tax credits, it appears industry will bear the brunt of delivering the surplus. Many of the measures outlined are focused on short term consumption rather than investing in long term growth which is disappointing.

While positive in its own right, the Government’s promise to deliver a surplus in 2012-13 will come at a considerable cost to business. The Government is putting an emphasis on boosting consumption by households in the short-term but a number of measures, and in particular the abandonment of the commitment to cut the company tax rate, will undermine businesses’ ability to boost productivity and growth over the longer term.

It remains to be seen whether the one-off payout to families which I’m sure will be welcomed by all, will improve the economy.

The AUD-USD exchange rate is starting to fall with $0.98 tipped by September.

• Problems increase the scene is a fuse to another global financial crisis centring around Europe.
• The lack of Building and Construction activity (outside of mining) even though the Reserve Bank has lowered its rates still causes concern.
• From a Turf production perspective sales of natural Turfgrass is still at the end of any building and construction or infrastructure projects.

The Australian Industry Group comment on the budget reports:

“Revenue projections are down sharply compared with last year’s Budget, but not much changed from the mid-year Budget review (MYEFO) last November. The Government has revised down its economic forecasts slightly since then, to 3.25% GDP growth in 2012-13 and 3.0% in 2013-14. Employment growth is expected to remain weak, with the unemployment rate rising to 5.5% this year, from its current level of 5.2%.

Large revenue losses (down by $5.7bn in 2011-12) have meant equally large spending cuts have been necessary to achieve the surplus. Savings of$32.6bn are identified over the next four years, although only $4.4bn of these are anticipated for 2012-13.

The burden of these required savings will fall heavily on business. This will impede businesses’ ability to lift investment, productivity and employment in the near term. The cancellation of the one percentage point reduction in the corporate tax rate will save the Government – but cost Australian business – $4.7 bn over the forecast period to 2016. This is offset to a small degree by the tax loss carry back provisions commencing in 2013, which will save business an estimated $713mn in tax over the next four years. Other big-ticket savings in this Budget that will directly affect Australian businesses include a massive $5.4bn cut to defence spending, $353mn less for the Australian Apprenticeships Incentives Program and $400mn saved from the closure of the Green Buildings program.

In the short term, this reduced support for Australian business will exacerbate the current slowdown in non-mining private sector activity, investment and employment. The potential longer term effects on much-needed innovation and productivity growth are also a concern, especially given that unemployment is expected to increase, largely for structural reasons”.

Key points for Australian business

The sharp fall in public spending this year will cause net public spending to detract from Australian GDP growth, knocking up to 1.0 percentage points off GDP growth in 2012-13. Even factoring this in, the Government expects the economy to grow by at least 3% in 2012-13.

While there are positive measures for business, the burden of revenue and spending measures in this Budget will fall disproportionately on Australian business. We note these particular measures for business:

• The one percentage point cut to the corporate tax rate will not go ahead. This will save the Government – but costing Australian business – $4.7bn over four years, including $1.2bn in 2013-14 and rising to $1.5bn in 2015-16,

• This will be softened somewhat by the ability of incorporated businesses to claim back tax losses against previous profits from 2013. This will be worth an estimated $713mn over four years, with most of it in the later years,

• There is a range of other changes to taxation arrangements both for business and individuals (see separate section below),

• Small business will benefit from previously announced tax deduction provisions for investment in plant and machinery assets of up to $6,500,

• Defence spending, investment and procurement will be hard hit, with $5.4bn cut from its budget over the next four years. This will adversely affect demand for Australian manufacturers and services that are geared to defence-related planning and needs,

• Skilled migration will be increased to 190,000.

• Higher education, vocational training, education and workforce participation programs were largely quarantined from cuts in this Budget. Older worker participation was highlighted and general workforce participation will be encouraged by raising the tax free threshold for low income earners. (See below for more detail on skills programs),

• Adverse environmental program changes were largely limited to the closure of the Green Buildings program. This would have delivered $400mn to building investors over the next four years,

• Infrastructure investments that are already planned will go ahead, with additional funding found to fast-track national transport priority projects including the Pacific Highway upgrade ($2.6bn), the Torrens Junction rail project ($232mn) and the western Sydney intermodal terminal ($358mn).

A range of deferrals and cancellations of previously-announced tax reforms feature prominently in the 2012-13 Budget.

For further details visit: http://www.aigroup.com.au/budget2012/analysis