Australian Federal Budget 2016 - key themes

The Government is directing savings from reductions in social welfare spending, tertiary education, the Public Sector Efficiency Dividend and the extra revenue from increasing the tobacco excise to increased spending on defence, infrastructure, lifting the 32.5% marginal tax threshold and lowering and expanding the small business tax rate and tax concessions.

Savings

Some key savings are the Public Sector Efficiency Dividend (a further $1.4bn over four years) while the deferral of the implementation of Jobs for Families Package is worth $1.2bn over four years.

Revenue raising measures

A new taskforce of more than 1,000 specialist staff at the Australian Tax Office is being formed to prosecute companies, multinationals and high wealth individuals. The latest measures include a diverted profits tax at a penalty rate of 40%, similar to that in the UK, on income multinationals have sought to shift offshore. Extending an annual 12.5% increase in tobacco excise for four years from mid-2017, estimated to raise $4.7bn.

National Innovation and Science Agenda

There is a $1.1 billion National Innovation and Science Agenda to support a culture of ideas and innovation.

Tax cuts

Ten Year Enterprise Tax Plan: the corporate tax rate will be reduced for all to 25% from 30% starting with a reduction to 27.5%, from 28.5%, for business with a turnover of less than $10 million. The current limit is turnover of less than $2mn. Businesses with a turnover of less than $10mn will also be able to access other tax incentives, including the small business depreciation pooling provisions, simplified trading stock rules and Pay-AsYou-Go tax instalment payment option. The lower company tax rate of 27.5% will apply to businesses up to $25 million in turnover in 2017/18, to $50 million in 2018/19 the rising to $100 million in 2019/20. For personal tax the 32.5% tax level threshold is set to rise to $87k from $80k costing tax revenue $3.95 billion over the next four years. For someone earning $87k, the lift in the threshold represents a saving of about $315 per year.

Infrastructure

An allocation of $50 billion for infrastructure between 2013/14 and 2019/ 20 which includes the WA airport rail link ($490mn), Ipswich motorway ($200mn), Melbourne to Brisbane Inland Rail ($549mn), and the National Water Infrastructure Loan Facility ($2bn).

Health

Additional $2.9mn spending over four years to support public hospitals, with links to reforms to reduce avoidable hospital admissions, improve patient safety and boost the quality of services.

Education

An allocation of $1.2 billion between 2018 and 2020 for schools, contingent upon reform efforts by the States and the non-government schools sector to improve education outcomes. Savings of $2bn estimated from delaying the deregulation of university fees.

Employment

An $840 million Youth Employment Package to get vulnerable young people into jobs. From April next year, young job seekers will participate in intensive pre-employment skills training within five months of registering with JobActive. Extra $88.6 million in supporting those job seekers, including young people, who wish to start their own business via the New Enterprise Incentive Scheme (NEIS).

Defence

The budget includes an additional $29.9bn for Defence which includes new naval capabilities such as: 12 new regionally-superior submarines; 9 future frigates; and12 offshore patrol vessels.

Superannuation

The higher tax rate of 30%, instead of the concessional 15%, will now apply to the contributions of those earning more than $250k, instead of the current $300k. A lifetime non-concessional contributions cap of $500k and there will be an annual cap on concessional superannuation contributions of $25k. The maximum which can be moved into the pension phase of super is now capped at $1.6m. The balance cap will be applied to both current retirees and to individuals yet to enter their retirement phase. Unused concessional caps will be allowed to be carried forward by individuals with superannuation balances of $500k or less, to enable ‘catch up’ superannuation contributions.

Medium term projections

Treasury is forecasting an underlying cash balance of –$37.1bn (–2.2% of GDP) in 2016/17, improving to –$26.1bn in 2017/18, then narrowing to only –$6bn (–0.3% of GDP) by 2019/20. Underpinning this is an economic growth profile of 2½% in 2015/16, up slightly from 2.2% in 2014/15, then holding at this rate to 2017/18 where it lifts to 3.0%. Wages are expected to remain subdued running at 2¼% in 2015/16 then gradually lifting to 2¾% by 2017/18 as the unemployment rate is expected to only modestly fall to 5½% by 2016/17. Inflation is forecast to remain subdued at 2.0% in 2016/17 before lifting to 2¼% by 2017/18. In regards to commodity prices, Treasury is forecasting fob prices of US$55/t for iron ore, US$91/t for metallurgical coal and US$52/t for thermal coal.

Risks

The Budget incorporates a smooth transition to around trend growth of 3%. A key risk given Australia's extended period of unbroken growth, in an environment of elevated global uncertainty, is clearly the possibility of a less positive outcome in the forecast horizon. Also representing downside risks to the projections are the commodity price forecasts. By comparison Westpac fob forecasts over the forecast horizon are US$42/t for iron ore, US$78/t for metallurgical coal and US$52/t for thermal coal.

Written by Westpac Economics

Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.

View other articles on the Federal Budget by Westpac Economics

Key themes

Major policy initiatives

Overview

Economic  outlook

View videos on the Federal Budget by Westpac’s Senior Economist Matthew Hassan.

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