University of Wollongong business academics provide expert reaction to the 2018-19 Federal Budget.
There must be an election looming
Associate Professor Charles Harvie, School of Accounting, Economics and Finance
I smell an election in the air! Economists tend to be more focused on the business cycle but last night’s budget had all the hallmarks of focusing on the election cycle. Despite a few bumps along the road (the GFC and post-resources boom era), the economy has remained remarkably resilient since our last official recession in 1991 (Treasurer Paul Keating’s “recession that we had to have”). This resilience is easy to take for granted but policymakers do so at their peril.
A strong sense of deja vu underlies this budget. The Treasurer appears to be relying on an ongoing strong performance of the economy – anticipated GDP growth of 3 per cent, wage growth of 3.4 per cent in the next two years from its current 2.1 per cent, productivity growth of 1.6 per cent from its current 0.4 per cent, income tax cuts that will stimulate consumer spending (which contributes 58 per cent of our economy), budget surpluses from 2019-2020, and declining government debt.
All sounds good and predicated on the basis that commodity prices remain strong, the global economy benign (from China in particular), and company tax cuts, and related increased investment, pass the Senate.
Our national economy is strengthening, but it is also true that the benefits are yet to reach everyone. This will take more time.Treasurer Scott MorrisonBudget speech, May 8th 2018
How realistic is this? There are many uncertainties in this rosy picture. Income tax cuts, starting with low- and middle-income earners on 1 July and for the rest of us next year ($530) are expected to be the major stimulator of spending in the economy, as is traditionally the case. The benefits flowing from this could be offset by weaker-than-anticipated wage growth, higher interest rates, a softening of house prices, and financial assets.
A rapidly changing labour market may make consumers more cautious and more debt retirement focused. Can the economy realistically achieve the productivity growth underlying the budget? This is a big ask even at the best of times and will require major “trickle down” investment effects from anticipated cuts to company taxes should this eventuate.
As to the global economy, this is anyone’s guess, but rising global trade tensions between the US and China may be a portent of things to come. As a relatively small, open economy heavily dependent on the Chinese economy this has very important implications for Australia. Overall, the GDP growth forecast upon which much of the related budget forecasts, including future tax cuts, depend, seems overly optimistic. For all the Treasurer’s ducks to line up would truly mean that we are “the lucky country”.
Tax cuts and infrastructure spending
Professor David Johnstone, University of Wollongong Sydney Business School
The budget used about half of an unexpected $40 billion of additional government revenue to pay tax cuts to low- and middle-income earners. No one would begrudge that except that the benefits might be more psychological than financial.
Tax cuts range from about $4 a week to $10 a week, so they won’t make life different. Any votes gained might come from the gesture more than the money. Low-income earners, the ones getting $4 a week, can at least feel they are in the politicians’ minds.
The money for infrastructure is needed because the private sector won’t build it. Things had to get ridiculous for governments to face what was always known, that the costs of really big roads and rail need to be met by taxpayers, who get jobs in exchange.
No one now seems to fight the idea that governments should build things. Governments can borrow more cheaply than the private sector and they can make all the rules, so if they can’t build something beneficial for life in this country, who can?
I have always thought it odd that politicians say they are great business managers, but their way of showing it is to cut costs and sell assets that an earlier generation built.
Tax, tax, tax
Dr Ian Fargher, University of Wollongong Sydney Business School
Overall the budget sets the scene for a tax battleground running up to the next election, where the major parties have divergent opinions including on capital gains tax, negative geared investments and corporate tax rates.
The Turnbull government has recently passed legislation to enhance the GST withholding arrangements for property developers and it will introduce a director identification number to combat illegal phoenix activity (registering a new company to takeover (rebirth) the failed or insolvent business of a predecessor company). These measures, commencing 1 July 2018, will boost revenue for the states and territories.
From 1 July 2018, employers with 20 or more employees will report payments such as salaries and wages, pay as you go (PAYG) withholding and superannuation information from their payroll solution each time an employee is paid. This aligns reporting obligations to the existing payroll processes of small businesses, regardless of whether wages are paid weekly, fortnightly or monthly. A significant proportion of small businesses with fewer than 20 employees will commence the transition to Single Touch Payroll (STP) from 1 July 2019.
The days of budget surprises have been consigned to the past with this budget delivering on the much discussed tax cuts. Personal tax will be reduced through reducing bracket creep and the extension of the “low-income” tax offset to the now “low-and-middle-income” tax offset.
Tax offsets are applied to reduce tax obligations at tax return time, so in order to receive the offset amount a taxpayer has to be subject to a greater amount of tax owing. An individual would not normally have to pay tax until they have earned $20,989. The full offset of $530 will eventually be available to those who earn up to $90,000 in 2021-22, with a phase out to zero at around an annual income of $125,000. Around 4.4 million people are expected to receive the full offset in 2018-19, with 10 million taxpayer benefiting to some extent.
The protection against bracket creep measures initially make a marginal adjustment to the 32.5 cents in the dollar threshold from $87,000 to $90,000 in 2018-19. This should provide a $135 tax benefit, or $2.60 per week to around 3 million people. The longer-term plan is to flatten the tax brackets. This means that from 1 July 2022 taxpayers earning between $41,000 to $120,000 will be taxed at 32.5 cents with the top of the threshold being raised to incomes of $200,000 by 2024, removing the 37 cents in the dollar bracket. Table 1 summarises the tax rate progression to 2025.
Research and development tax incentive
Measures have been announced to clarify and clean up the research and development (R&D) tax incentive, which has blown out from $1.8 billion in 2011-12 to $3 billion in 2016-17. The reforms focus on the integrity of the scheme such that incentives objectives are not diminished by ineligible claims and contrived schemes. To this end the government will, from 1 July 2018:
- introduce a $4 million annual cap on cash refunds for R&D claimants with aggregated annual turnover less than $20 million. Amounts that are in excess of the cap will become a non-refundable tax offset and can be carried forward into future income years;
- exclude R&D tax offsets for clinical trials from the $4 million cap on cash refunds, recognising the critical role of R&D expenditure on clinical trials in developing life-changing drugs and devices; and
- amend the refundable R&D tax offset so it is a premium of 13.5 percentage points above the claimant’s company tax rate for that year.
Fact sheet: research and development tax incentives.
Tax integrity measures
Despite the Australian Taxation Office’s (ATO) crackdown on over-claiming of work-related deductions, there is nothing in the budget to address the issue, such as a move towards standard deductions, similar to the system used by the Internal Revenue Service in the United States of America. Australia has one of the most generous work-related deductions frameworks, which the ATO claims is being abused by some tax practitioners.
The budget contains a response to the Black Economy Taskforce report, presented in October 2017, with $12.5 million to be provided to Treasury over five years, to manage the implementation of the whole-of-government recommendations.
The ATO will be provided with $318 million over four years to implement new strategies to combat the black economy, including $3.4 million to lead a multi-agency Black Economy Standing Taskforce that will facilitate a cross-agency approach to combating the black economy.
Specifically, illicit tobacco smuggling and domestic production will be a focus area through the creation of the Illicit Tobacco Task Force. Other black economy measures include:
- the introduction of a $10,000 cash payment limit for business goods and services from 1 July 2019;
- businesses will no longer be able to claim deductions for payments to their employees such as wages where they have not withheld any amount of PAYG from these payments; and
- remove deductions for payments made by businesses to contractors where the contractor does not provide an ABN and the business does not withhold any amount of PAYG despite the withholding requirements applying.
The Taxable Payments Reporting System (TPRS) will be extended to the security, road freight and computer services industries. The ATO’s excise systems will also receive an upgrade, replacing the current paper lodgement system.
Low- and medium-income tax cuts: Putting it into perspective
Dr Martin O’Brien, University of Wollongong Sydney Business School
One of the most publicised aspects of the budget was income tax cuts for low- and medium-income earners. Those with incomes under $37,000 per annum will see a $200 reduction in tax, while those earning between $48,000 and $90,000 per annum will receive the maximum tax decrease of $530 or about $10 per week, which gradually phases out for those earning $125,000 or more.
In Treasurer Morrison’s words, this tax cut represents a household paying a car registration, filling up the car six times, a quarter’s electricity bill, buying a washing machine, or school uniforms for the year.
No household is going to begrudge an income-tax cut, especially in the low wage growth climate Australians have faced since the financial crisis. Most commentators have placed taxpayers in the “winners” column from this budget. Furthermore, Labor were quick to support these cuts. But how much of a difference will it make to households or the economy?
Only a week ago, Reserve Bank Governor Phillip Lowe stated: “While low growth in wages has helped boost employment, it has also put the finances of some households under strain, especially those who borrowed on the basis that their incomes would grow at the old rate … Perhaps more importantly, sustained low wages growth diminishes the sense of shared prosperity that we have in Australia.”
In other comments, Reserve Bank analysts estimated that Australia needs 3.5 per cent wage growth for a healthy economy. Notably, future budget estimates required to deliver a budget surplus forecast wage growth at more than 3 per cent.
While undoubtedly a popular policy, the tax cuts are unlikely to affect household budgets in a hurry. Those eligible for this tax relief will have to wait until July 2019 to receive it as part of their tax return. Any increase in official interest rates, or even an autonomous increase in rates from the big four banks will wipe this out, as would any unexpected hike in other household expenses such as petrol prices.
The federal government wants to give back to low-income earners. But last year the federal government was critical of minimum-wage and award-wage increases of 3.3 per cent handed down by the independent umpire, the Fair Work Commission, and refused to support further minimum wage increases in 2018.
The 2016-17 minimum wage increase from $17.70 to $18.29 per hour equated to a weekly increase of $22.30 for the lowest earners in Australia or $1,160 per annum, while for example a level 4 retail employee received a weekly increase of $25.80 or $1,340 per annum. Even after accounting for income tax, these income increases were greater than the tax cuts in the Budget.
In summary, the tax cuts for low- and medium-income earners is a win for the taxpayer, but at the equivalent of about $10 per week, it won’t make a huge difference to household budgets, which have been under strain with recent low wage growth.
Nor are the cuts likely to push wage growth above 3 per cent as desired by the Reserve Bank and future budget estimates. Based upon recent wage growth evidence, government reluctance to support minimum wage increases elsewhere, and the current small income tax increase in the current budget, the responsibility now falls onto business and company tax cuts to filter down to wage increases.
Speaking of such, company tax cuts were a notable omission from the Treasurer’s speech as they are currently stalled in the Senate. Expect them to be a major election issue and point of difference between the two major parties.
Incentives and greater choices for retirees
Dr Martin Gold, University of Wollongong Sydney Business School
The budget has provided stimulus for the development of new retirement income products. The government will introduce a new covenant into superannuation regulations that will compel superannuation fund trustees to offer what are known as Comprehensive Income Products for Retirement (or CIPRs).
The take-up of CIPRs is also expected to be encouraged by means testing rules for the aged pension (for superannuation members who are eligible), which will only include 60 per cent of the assets and income from pooled lifetime income streams from 1 July 2019.
CIPRs are products that extend the tax concessions on earnings of superannuation fund balances beyond retirement age and are intended to provide income streams to meet living expenses, from the commencement of a member’s retirement to the end of their lifetime.
By contrast, conventional account-based pensions offer a more simplistic solution for meeting retirement income needs: members in the pension-paying phase usually withdraw a minimum amount from their retirement funds each year calculated according to a formula which depends upon their age and the balance of their funds. Members therefore draw money from their savings, however, this may be a combination of investment earnings and capital.
Unlike a conventional superannuation investment strategy that focuses on maximising total return throughout a member’s working life, CIPRs are expected to provide a more calibrated investing approach that more closely supports their individual circumstances. To enable consumers to make better-informed choices, the government has also promised to formulate new standardised disclosure rules for retirement income products.
In this Budget we are providing tax relief to encourage and reward working Australians and reduce the cost pressures on households.Treasurer Scott MorrisonBudget speech, May 8th 2018
Offering industry clear policy settings and stability for the deeper development of CIPRs is commendable, and this budget announcement will likely stimulate product development and greater consumer choice.
Consumers need to be aware that industry providers will design a “better mousetrap” (especially when compelled by superannuation regulations) but fairly; the costs of these products will need to be recovered. No detail has been provided about the rules for enhancing product disclosure, however, past experience has shown that creating useful standardised measures can be problematic for individual circumstances.
More retirees may consider CIPRs and other tax-advantaged retirement income stream products that should support improved financial sufficiency and living standards. This should also lower dependence on the aged pension, which is a significant fiscal challenge for the current and future governments.
Compelling superannuation trustees and retirement product providers to offer CIPRs brings a sharper focus on investment strategies and costs, which is important. Of course, maintaining Australians’ confidence in contributing more to their superannuation prior to retirement is imperative, which in turn relies upon a growing national economy. Finding returns continues to be the biggest challenge, especially in a world with highly correlated assets and low real returns: CIPRs, other pooled income stream products, and superannuation itself cannot solve this problem.
Recent research has shown that in contrast to generally accepted wisdom, spending by retirees does not accelerate (and may actually decelerate) throughout member’s retirement. Within so-called life-stage investment products, which dominate the default MySuper funds category, very large variations in asset portfolios are found for funds designed for/competing for the same members. This sort of evidence indicates how challenging it will be for superannuation trustees and CIPR providers to justify investment product designs, even in times of economic prosperity.