Budget 2014: Corporate welfare slashed, but company tax cut left out of budget

Updated May 13, 2014 23:59:42

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The Abbott Government is dramatically reducing corporate assistance, but its planned company tax cut and parental leave scheme have been left out of the budget.

In his first budget speech, Treasurer Joe Hockey again committed to the Government's election promise to lower the company tax rate.

"To improve business opportunities, we are cutting company tax by 1.5 percentage points for around 800,000 businesses," he told Parliament.

However, for whatever reason, the Government's planned company tax cut, paid parental leave scheme and the proposed 1.5 per cent levy on big business to fund the leave scheme have been left in the contingency reserve, rather than costed individually in detail in the budget.

The Australia Institute's Richard Denniss says the absence of the parental leave scheme from the budget papers indicates uncertainty about whether it will proceed, and in what final form.

"The much awaited paid parental leave scheme appears that it will be well overdue," he said.

"While the Prime Minister has spent a lot of time and a lot of political capital assuring voters that his scheme is on track, clearly the Treasury boffins, and maybe even the Treasurer, are far less confident."

The absence of the company tax cut from the detailed budget measures, and the Treasurer's notably non-time specific reference to it in his speech, appear to leave open the prospect of a delay in the business tax reduction.

Auto subsidies slashed

In line with the spirit of recommendations by the Commission of Audit, although perhaps not as severe as the commission's recommendations, the Treasurer tonight announced steep cuts to a range of industry assistance.

The automotive sector will endure a net loss of money as the Federal Government has cut short or cancelled programs in response to the announcements by Toyota and Holden that they would join Ford in ceasing Australian car manufacturing.

The Government has ditched the Supporting Automotive Sector jobs program announced by the previous government just before the election, saving $100 million this year and another $100 million next.

The Government will also shut down the Automotive Transformation Scheme (ATS) on January 1 2018, after the last remaining local car assembly finishes with the departure of Holden and Toyota in 2017.

However, the Treasury says $1 billion remains available in the ATS to assist the sector from the current financial year until the scheme ends.

A further $215 million will be saved by cancelling funding for Holden's next generation vehicle project, given that the carmaker is no longer going to produce cars in Australia after 2017.

While pulling hundreds of millions from auto assistance, the Government has committed to spending $100.6 million over six years to establish a Growth Fund to assist the Victorian and South Australian economies adjust to a future without car assembly. 

An additional $50m will be provided for a Manufacturing Transition Grants Programme to assist manufacturers to move towards higher value and niche manufacturing opportunities.

One industry receiving more assistance is mining.

Not only will miners save an estimated $3.4 billion over the next three years from the abolition of the Minerals Resource Rent Tax, small explorers not making any taxable income will be able to access $100m worth of Exploration Development Incentives to pay as a refundable tax offset to their Australian shareholders.

Training and enterprise assistance cut

The Government has moved to consolidate a range of separate industry assistance programs while cutting overall funding for them.

The budget announces the creation of the Entrepreneurs Infrastructure Programme at a cost of $484.2 million over five years, which aims to support the commercialisation of good ideas and provide market and industry information and advice.

However, related to the establishment of this one-stop shop, the Government is eliminating eight separate industry assistance bodies and programs that perform a similar function to save $845.6 million over five years.

It will also save $124.7 million over five years by reducing funding to Clean Technology (Investment and Innovation) programmes and Cooperative Research Centres.

In a similar move, the Commonwealth will also save more than half a billion dollars by abolishing 10 different skills and training programs and rolling them into one Industry Skills Fund to support the training needs of small and medium enterprises, focusing on health, mining and advanced manufacturing.

Businesses will be required to make a co-contribution to the cost of training, with the size of the contribution depending on the size of the business.

The Government is also making a large saving by dropping the ‘Tools for your Trade' apprenticeship assistance program to save $914.6 million, and replacing it with Trade Support Loans costing $439 million - a net saving of $475.6 million over the forward estimates.

Renewables and research reductions

As expected, the Abbott Government has used its first budget to make steep cuts to renewable energy and scientific research funding.

The Government is saving $338.5 million over the forward estimates, and $1.3 billion over the five years starting in 2017-18, by abolishing the Australian Renewable Energy Agency.

It is also slashing funding to the Carbon Capture and Storage Flagships Program by $162.9 million in the forward estimates, and a total of $459.3 million to 2019-20.

The budget also revealed a $16.8 million cut to funding for the National Low Emissions Coal Initiative.

Australia's scientific research agencies are taking a substantial budget hit, with the CSIRO's funding cut by $111.4 million over four years, the Australian Nuclear Science and Technology Organisation's budget reduced by $27.6 million, and the Australian Institute of Marine Science losing $7.8 million.

However, medical research is being boosted by a fund that will distribute $276.2 million over the three financial years starting in 2015-16, and ultimately aims to provide $1 billion per annum in medical research funding by 2022-23 by investing the savings from cuts being made elsewhere in the health budget.

Subsidies to biofuel producers are also being ditched in favour of excise reductions, which will cost the budget significantly less.

The budget outlines a saving of $120 million over six years by ceasing the Ethanol Production Grants Program and instead reducing the excise on domestically produce ethanol.

The Government will also save $156 million over four years by eliminating grants under the Cleaner Fuels Grants Scheme and instead cutting the excise on biodiesel.

Competition watchdog benefits, corporate regulator loses out

The Government seems keen to focus on small business and enforcing competitive markets, with the Australian Competition and Consumer Commission receiving a $68.5 million funding boost over four years.

There is also $8m in extra funding in the budget to turn the existing Office of the Australian Small Business Commissioner into a Small Business and Family Enterprise Ombudsman with extra powers and functions to act as a one-stop shop for small business interactions with Government.

However, the main corporate and financial market regulator – the Australian Securities and Investments Commission - loses $120.1 million over five years, in a widely anticipated steep budget cut.

The Government has also confirmed in the budget that it will be investigating the potential privatisation of ASIC's corporate registry function.

Australian Hearing, the Defence Housing Authority and the Royal Australian Mint are also being investigated for privatisation.

As expected, the Australian Taxation Office is losing $142.8 million in funding over the forward estimates, partly in response to the increasing automation of tax returns.

Super up, first home savers out

To end uncertainty for businesses, the Government has confirmed the superannuation guarantee will go up to 9.5 per cent on July 1, costing the Government $350 million in extra super concessions.

However, it will then be frozen until June 30 2018 – beyond the end of the forward estimates - before increasing 0.5 per cent a year thereafter to eventually hit 12 per cent. This freeze will save the Government $440 million in 2017-18.

The Government is also making $143 million in savings over five years from ditching the First Home Saver Accounts scheme, effective for new accounts opened from tonight.

Don't know your structural deficits from your bracket creeps? Ahead of the Federal budget ABC News has decoded all the economic jargon to help you understand what is in store this year.

The deficit is just the amount of money that the government spends beyond what it receives in a financial year.
Just because you return the budget to surplus doesn't mean that the debt incurred by the previous deficits disappears.
Any deficits, or shortfalls, instead are added to existing government debt, which currently sits at $319 billion.
While $319 billion sounds like (and is) a lot of money, by international standards Australia's public debt is quite low, sitting at 21 per cent of GDP, the second lowest of the advanced economies - and that's just gross debt, which doesn't include the value of Australia's financial assets, such as the Future Fund.
However while government debt can pose problems, it isn't quite the same as personal debt and can often serve a purpose.
Governments take on debt by issuing bonds to investors that are paid a return, with ratings agencies allotting a credit rating to government debt. A high credit rating, such as the one Australia has, allows governments to borrow at a very low rates, with investors trading profit for security.
Some economists argue this ability to borrow at a lower rate than the market should be use to fund infrastructure projects that are likely to make a profit, as well as boosting productivity.
Forward estimatesThe forward estimates are a series of projections released alongside the budget predicting revenue and expenses for the next four financial years. As they rely on assumptions about revenue and indicators, they are often subject to change - as the mining boom unfolded the estimates often undervalued the amount of revenue, and after commodity prices peaked they have had to be revised downwards. But the estimates are seen as a useful way of showing the government's longer-term plans for spending.
Revenue collapseOver the past few years there has been a significant drop in the amount of tax revenue coming into the government. There is some contention over the reasons behind the drop, but economists are united in saying that at least part of the problem facing the government in its quest to return to a surplus stems from a lack of revenue, rather than too much government spending.
GDPThe annual value of goods and services produced by a country. GDP is generally recognised as one of the key indicators of the state of a country's finances.
Nominal GDPA version of the gross domestic product that has not been adjusted for inflation. This means the GDP will appear higher than it actually is, as it fails to take into account the devaluing effect of inflation. However it is also the measure of GDP that is closest related to government revenue and spending, as both are affected by inflation.
Terms of trade
Terms of trade measures the relationship between the prices a country receives for its exports and the prices it pays for its imports. A rising terms of trade means the nation is getting better prices for its exports relative to what it pays for imports, and vice-versa. Australia benefitted from rising terms of trade during the mining boom as the prices of iron ore, coal and other commodities surged, while the price of many imports such as electronics and clothes stayed steady or fell.
Economists are cautious about drawing too many conclusions from high or low terms of trade figures, but trends in the movement of the terms of trade are useful for predicting changes in the standard of living.
Tax expendituresTax expenditures are sources of revenue the government goes without due to tax concessions. While they are not government spending, they represent significant losses of potential revenue for the government. In 2013-14 expenditures hit the budget bottom line to the tune of $115 billion, and while some of this is offset by increases in productivity and increased spending, it remains a significant source of potential revenue the government is missing out on. Among the most well-known examples of tax expenditures are superannuation concessions and the capital gains tax exemption on the family home.
Negative gearingNegative gearing allows property investors to write the interest costs of their mortgages off as an income tax deduction against other sources of income, and has been blamed for soaring property prices as it subsidises loss-making real estate investments.
Superannuation concessions
Super concessions are tax breaks designed to encourage people to put more money into superannuation, in theory saving the government money down the track by reducing the burden these people will have on the public purse when they retire.
Currently superannuation is taxed at 15 per cent, with super earnings not taxed at all once you hit 60 years of age. Employers are required to put aside 9 per cent of an employee’s income into a super fund. The superannuation concession allows people to voluntarily contribute more to their superannuation and still be taxed at the rate of 15 per cent, well below the majority of tax rates.
The concessions have been criticised for disproportionately benefiting the wealthy, who get a much bigger discount on their normal income tax rates than those in lower tax brackets.
With many wealthy people likely to be ineligible for the pension on reaching retirement anyway, critics argue that the concessions cost the government far more in lost revenue than it would cost to support wealthy individuals with the aged pension.
According to the Australia Institute, superannuation concessions cost the Federal budget $35 billion in 2013-14 (with that number expected to rise to $50.7 billion by 2016-17), of which 30 per cent ($10.5 billion) goes to the top 5 per cent of income earners.
Debt Levy
The debt levy has been proposed as a possible means for the government to pay back the budget surplus, and is expected to hit people earning more than $80,000 or $180,000 a year, taking an extra 1 per cent of their annual income.
The Government, including Prime Minister Tony Abbott, is claiming it does not constitute a broken promise, as the levy will not be permanent (and so is different from a tax), but widespread polling indicates this won't wash with the public.
Middle class welfareMiddle-class welfare is a term used by economists and commentators to refer to the increase in tax breaks and welfare payments for those on higher incomes that came in under the Howard Government. The private health insurance rebate for higher income earners has been singled out as an example of this. The majority of the policies labelled 'middle-class welfare' were maintained by the Rudd and Gillard governments, with any attempts to wind them back labelled "class warfare". But some economists have argued this has significantly contributed to the collapse in tax revenue.
Parameter variationsParameter variations refer to the budget’s assumptions about the economy (such as growth, inflation and unemployment) and how these will affect revenue and costs. The parameter variations in the MYEFO were vastly different to those set out in the PEFO, leading commentators to question whether they were massaged to provide a worst-case scenario, giving the Government more freedom to implement unpopular cuts and space for a miraculous recovery in the upcoming budget.
The age of entitlement is over
A term first mentioned by Treasurer Joe Hockey in a speech to British Conservatives in early 2012 that has become the informal motto of his time as Treasurer.
Despite following up his debut of the term with an attack on Labor’s attempt to wind back the health insurance rebate, Mr Hockey has signalled that in order to get the budget back to surplus, sacrifices must be made by all, from businesses to the man or woman on the street.
Whether this commitment goes beyond political rhetoric to actual structural reform is a question many expect to be answered in Tuesday's budget. So far the government's unwillingness to bail out the car industry, and public speculation about a debt levy on high income earners, indicate this may be the case.
Efficiency dividend
A reduction in funding for Commonwealth government portfolios designed to drive efforts to increase efficiency. First put in place by the Hawke government, the dividend is based on the rationale that without market demands there is no pressure for government departments to find ways to save money through efficiency, and was originally labelled a dividend as it aimed to return revenue to the taxpayer.
The dividend only aims to reduce expenses around the operation of a department, not the overall funding, and so is applied before budgets are indexed to account for increases in wages.
There has been speculation an efficiency dividend will be applied to the ABC and SBS (which have previously been exempt) as a way of reducing funding to the broadcasters without breaking an election promise made by Tony Abbott that there would be no cuts to either organisation.
Structural deficit
A structural deficit refers to a situation where the current tax structures of a country will fail to cover the expenses, even when an economy is performing at its peak. Governments commonly run deficits in times of economic downturn as a means of insulating the economy and ensure services are not impacted, with the understanding that surpluses during peak times will help pay down the debt incurred by going into deficit.
Working out whether a government has a structural deficit is complicated by the changing nature of sources of revenue and costs for governments, but governments and economic organisations try to remove the influence of temporary impacts on the budget bottom line to assess the long-term prospects for the economy. In the MYEFO the structural deficit was estimated at 2-3 per cent of GDP.
Fiscal drag
Fiscal drag refers to when excessive taxation or a lack of spending by the government puts a dampener on the economy.
Bracket creep is a form of fiscal drag that occurs when tax rates do not keep up with wage increases in the economy, pushing wages up to a higher bracket, and resulting in the government taking more tax revenue.
Tax brackets are designed to be indexed to account for increases in inflation, however the indexes are usually set manually, and leaving them stationary while wages grow allows the government to increase the amount of revenue it takes from taxpayers without raising taxes.
Warnings from accounting firms KPMG and PwC have fuelled speculation that the government is planning on letting bracket creep do some of the heavy lifting when it comes to recovering revenue.
Bracket creep
PEFOThe Pre-Election Economic and Fiscal Outlook was released by the Federal Treasury shortly before the last election, and represents Treasury's and Finance's predictions on the current and future state of the economy. While budget bottom lines are often open to manipulation by governments, the PEFO is put together independently and the only outlook signed off by the heads of Treasury and Finance.
MYEFOThe Mid-Year Economic and Fiscal Outlook is an update to the budget that the government releases halfway through the financial year. The most recent MYEFO showed a major increase in the budget deficit from the PEFO, prompting speculation over whether the government was using a worst case scenario to strengthen the case for unpopular cuts and pave the way to a budget recovery.
Vertical fiscal imbalanceThis refers to the fact that the Commonwealth raises the vast bulk of tax revenue, but the states have a large part of the spending responsibility. There is currently a large shortfall in the amount of tax the states receive compared to the cost of providing the services required of them, such as healthcare and education. This current imbalance is overcome by the Federal Government distributing money raised by the GST to the states, but this makes the states reliant on federal grants and subject to greater federal control.
Underlying cash balanceThe benchmark measure of the government’s budget position: deficit equals less revenue than spending; surplus equals more revenue than spending; balance equals revenue matches spending.
Unemployment rateCritical to the budget on both the revenue and spending fronts because a higher unemployment rate means less income tax revenue (and potentially less GST from consumption), while also meaning more money going out in unemployment benefits.
Consumer price indexMeasures the inflation in the price of goods and services. Important to the budget because higher prices mean more GST revenue, although they also mean higher increases in government payments indexed to CPI and higher costs for government purchases.
Wage price index
Measures the change in wage levels paid to employees. Important to the budget because higher wage growth across the economy means faster growth in income tax revenue, which can be magnified by bracket creep – individual income taxes (which includes non-wage related capital gains tax) make up around 46 per cent of federal government revenue.
Higher economy-wide wage growth may also mean larger rises in public service pay, but the income tax boost to the Government far outweighs this cost.
Corporate profitsImportant to the budget because company tax makes up more than 18 per cent of federal government revenue. The faster corporate profit growth, the healthier are government revenues. A fall in company tax revenue, due to slower than expected profit growth and higher than expected deductions, accounted for a large proportion of the previous government’s revenue write-downs.
Consumption subject to GSTGST accounts for around 14 per cent of the Federal Government's revenue, although it is ultimately distributed to the States in grants. Not all goods are subject to GST, and the growth in consumption of exempt goods (such as fresh food, education and healthcare) has recently been much faster than the increase in purchases of goods subject to GST. Obviously, faster growth in the consumption of GST-levied goods means a greater increase in GST revenue for the government.
GP co-paymentThe Government has introduced an upfront $7 co-payment for bulk-billed visits to the GP. After 10 visits, patients with concession cards and children under 16 will be exempt from the fee.
Fuel exciseThis is a tax on petrol that currently sits at 39 cents per litre. The Government in the budget announced it would index the fuel excise twice a year to raise it in line with inflation, resulting in higher fuel prices.

Topics: budget, government-and-politics, federal-government, federal-parliament, parliament, industry, tax, hockey-joe, business-economics-and-finance, australia

First posted May 13, 2014 19:40:10