Prime Minister Malcolm Turnbull is fond of declaring "there has never been a more exciting time to be an Australian".
And Treasurer Scott Morrison has followed suit with his own superlative, challenging that the 2016-17 Budget cannot be “just another budget, because these are extraordinary times.”
So, does the 2016-17 Budget live up to the hype?
For all the pre-budget talk of uncertainty and volatility in the global economy, Treasury is projecting a remarkably stable macroeconomic picture – the economy growing at a healthy three per cent from 2017-18, unemployment a benign 5 time and a half per cent, and inflation well inside the RBA’s comfort zone. Hardly extraordinary.
The Treasurer mentions China just once in the budget speech. Only in the detailed budget papers is there caution as to the extent to which our economy is tied to the economic fortunes of our now largest trading partner and growing source of foreign investment capital. Indeed, there seems to be a newfound bullishness in the world economy, with prices for key exports rebounding strongly from the December Mid-Year Economic and Fiscal Outlook – iron ore export prices from $US39/t to $US55/t, and metallurgical coal from $US73/t to $US91/t.
Treasury fundamentally is relying on solid economic growth to bring the budget back into line, even if a surplus is now not expected until at least 2020-21.
Notwithstanding the Treasurer’s crediting this fiscal improvement on policies that “continue to control spending”, the real budget hero is tax revenues.
The Federal Government’s tax revenues are forecast to increase from 23.5 per cent of GDP in 2015-16 to 25.1 per cent of GDP by 2019-20. Federal Government expenditures do contract, but by a comparatively modest 25.8 per cent to 25.2 per cent of GDP.
Over the four year period to 2019-20 the Federal Government’s nominal tax receipts will swell by almost 30 per cent. Treasury is forecasting that tax receipts will top $500 billion by 2019-20 – that’s half a trillion dollars. And to get there the Federal Government will need to collect each year an additional $28 billion, equivalent to around 40 per cent of what it currently collects in company and resource rent taxes.
To be fair, it isn’t just growth doing the heavy lifting. The 2016-17 budget did introduce a number of significant tax policy changes, but well short of the hoped-for comprehensive tax reform package.
The corporate tax rate cut is a start, but needs to be complemented by a broader structural reform of taxation that makes our tax base more stable and does not penalise growth, investment or incentives. While the politics of an extended phase in and prioritisation of small business is understandable, these constraints dampen the scale and pace of any economic dividend.
If the economy is to buzz at the rate required to meet Treasury’s projections, startups and small and medium businesses must accept the growth challenge. The economy needs small business to fire, and to fire fast.
The small adjustment to the $80,000 tax bracket for individuals is a cost-effective first step but is only a stop-gap measure.
The 2016-17 Budget also included a range of tax “integrity” measures aimed at larger and multinational corporates. Australia has a heavy reliance on foreign capital, and needs a competitive tax system to remain an attractive place to invest and do businesses. However, corporate Australia does need to work to build trust with the community, and committing to transparency measures will help tackle the public perception that some parts of the economy are not paying their fair share of tax.
There also were significant changes to superannuation policy, targeted squarely on higher-income earners. Perhaps stung by the criticism in recent budgets that savings efforts have unfairly fallen on lower income earners, the Treasurer has been at pains to point out that 96 per cent of the population will be better off or not affected by the proposed changes to superannuation, and that those affected are the most well off in the community.