If there was a catchphrase from Treasurer Scott Morrison’s Budget speech on Tuesday night, it was “transition to the new economy”, which was repeated several time in his Budget speech.
Gone is the Abbott Government’s bluster over the “Budget emergency” and “ending the age of entitlement” – including cuts to health, education, pensions, unemployment support and family payments – replaced by modest tax cuts for small-to-medium enterprises (SMEs) and upper-middle income earners, funded by modest tax increases on high income earners’ superannuation earners (affecting just 4% of taxpayers) and a crack down on multinational tax avoidance.
Specifically, last year’s company tax cut from 30% to 28.5% for small businesses with turnover of $2 million or less will be extended to SMEs with turnover of $10 million. Their tax rate will also be lowered further from 28.5% to 27.5% from 1 July 2016.
The annual turnover threshold will then be increased each year – i.e. to $25m in 2017-18, to $50m in 2018-19, to $100m in 2019-20, etc – until all corporations face a tax rate of 27.5% in 2023-24. By 2026, the corporate tax rate will then fall to 25% for all corporations, thus bringing it in line with the OECD average.
The “Tony’s tradies” initiative last year, which allowed companies with turnover of less than $2 million to write-off $20,000 of capital expenditures, has also been extended to SME’s with turnover of $10 million.
Together, the measures are estimated to cost $5.3 billion in lost revenue over four years.
Workers earning more than $80,000 a year, which represents the top 25% of earners, will benefit from an increase in the tax bracket from $80,000 to $87,000, thus ensuring roughly 500,000 taxpayers avoid moving into a higher tax bracket because of “bracket creep” (aka “fiscal drag”).
Earlier this week I outlined why lowering the company tax rate and cutting income taxes for those earning more than $80,000 would worsen inequality, which you can read here.
The Turnbull Government will fund the tax cuts by clamping down on multinational tax avoidance. 1,000 ATO staff will be employed to enforce multinational compliance. A 40% “diverted profits tax”, modelled on the UK system, will also be implemented, and there will be increased penalties for illegal avoidance.
The Government expects to raise $3.9 billion over four years from these measures.
The tax cuts will also be funded by modest but worthwhile changes to superannuation, including:
- The $15% high income super surcharge will be lowered from $300,000 to $250,000.
- Introducing a $25,000 cap on super contributions for those aged under 50 and $35,000 for those aged over-50 (although this can be rolled-over for those with interupted work patterns).
- Capping tax-free superannuation accounts at $1.6 million, applying to both prospective and existing retirees. Additional balances over $1.6 billion will be taxed at a still concessional 15%.
- Introducing a lifetime cap of $500,000 on non-concessional superannuation contributions.
- Abandoning plans to remove the low income superannuation tax offset, which was introduced under Labor, thus ensuring that those earning less than $37,000 will not pay more tax on their super contributions than their earnings.
According to Scott Morrison, only 4% of taxpayers will be affected by the super changes and it will save the Budget just $2.9 billion over 4-years.
Finally, as telegraphed already, tobacco excise will be raised by 12.5% over four consecutive years, effectively copying Labor’s policy.
On the expenditure side, there is a plethora of pork flowing to the local defence industry, with the Defence budget to rise to 2% of GDP by 2020-21, three years earlier than originally planned. Of course, South Australia and Western Australia will benefit from the construction of new submarines and patrol boats. Oink, oink.
There’s some decent infrastructure spending. The Government will spend almost $3 billion on new infrastructure projects, mostly in Victoria and mostly road-based. Importantly, however, the Government will commit $590 million for land acquisition and pre-construction work for an inland freight railway linking Melbourne and Brisbane. I have explained previously why I strongly support such a project.
While Australia’s youth will be shut-out of the housing market – thanks to the Coalitions deplorable support of negative gearing and the capital gains tax rorts – the Government will at least provide some support to young unemployed job seekers.
A new initiative, entitled the Youth Jobs Path program, will provide $752 million to train people aged under 25 and currently on employment benefits to enter the workforce. The Government will also set up an internship program, from 1 July 2016, that will provide hands-on work experience to around 30,000 youths each year. Each intern will work 15 to 25 hours a week and receive $200 per fortnight on top of their regular welfare payments.
That said, while the Government did not specify any cuts, it has kept nearly $2 billion in savings from Higher Education Reform in the forward estimates, suggesting university funding cuts are still on the agenda. It will also reduce welfare payments to new recipients by up to $14.10 less a fortnight by scrapping the carbon compensation scheme.
Overall, this is a timid Budget that fails to move the needle in either direction. Most of the policies were flagged well in advance and there were no major surprises.
