What to expect from the Federal budget 2011-05-06

After a good month of lowering the expectations of voters, Federal Treasurer Wayne Swan will deliver his fourth Federal budget tonight against the backdrop of a patchy economy, a soaring Australian dollar and weak tax revenue.

Swan is promising a no-frills budget, with the focus likely to be on spending cuts rather than new initiatives. He has little alternative – if the Government wants to meet its promise of getting the budget back to surplus by 2012-13, Swan must keep his hands on the purse strings.

SmartCompany will report all the key SME news from the budget tonight, but in the meantime here is our list of the 10 big things to watch out for.

A new tax break for small business

Federal Treasurer Wayne Swan announced on Sunday that the Government would replace the existing Entrepreneur’s Tax Offset (aimed at micro businesses with under $70,000 in revenue) with a new $5,000 tax deduction for a small business (under $2 million in revenue) that buys a vehicle. The Government says the measure is designed to support small business operators battling what Swan calls the “patchwork economy”. However, the new measure doesn’t kick in until the 2012-13 year.

The replacement of the ETO will save the Government $15 million over four years which may make some business owners suspicious of the motives here, but it does appear the tax break should assist a greater number of entrepreneurs over the long-term.

A worse-than-expected budget position for next year

Poor old Wayne Swan has spent a good deal of this year watching his Government revenue dropping, dropping, dropping. First came the floods in Queensland, NSW and Victoria, then came the continued slump in consumer confidence, then the high Australia dollar and then the drop in capital gains receipts. Swan said a few weeks ago revenue will come in about $4 billion lower than expected; that will likely mean a budget deficit for 2010-11 of around $50 billion and a deficit for 2011-12 of $16 billion, up from the $12 billion predicted at the end of last year.

The budget back in surplus in 2012-13

Despite the economic headwinds currently hitting the budget, ANZ Bank says the Government will be able to meet its promise of having the budget back in surplus by 2012-13. Indeed, the bank says this is likely to be the only thing on the Government’s mind.

“There is no reserve of political capital for the Government to draw on to take the big decisions and cut into the structural budget deficit. Instead the Treasurer will focus on the political objective of getting the headline budget numbers back into balance by 2012-13. Though commendable, we see this as a fairly low hurdle.”

Changes to the excess super penalties

Superannuation experts and quite a few taxpayers would have silently cheered when Assistant Treasurer Bill Shorten admitted that he had been hit by the Government’s aggressive penalty regime for excess super contributions – in some cases, taxpayers that exceed the Government’s thresholds (which go up to $50,000) can be hit with penalties of 93%.

Expect the Government to soften their stance, either reducing the penalty rate or introducing some flexibility for the ATO to take into account errors or special circumstances.

Cuts to middle class welfare

The Government needs to make spending cuts to achieve its 2012-13 surplus and the perennial target is so-called middle class welfare, such as family tax benefits and private health insurance. The latter is already a target – the Government is already planning to re-introduce legislation that will tighten eligibility for private health insurance rebates, despite the Coalition saying they will block it. It will be interesting to see whether the Government also takes the knife to family tax benefits as well.

A crackdown on trust tax breaks

Trust crackdowns are a pretty regular occurrence these days – it’s either the ATO getting aggressive, or the Government getting worried. A few weeks ago, ATO figures were leaked showing Tax Office investment earnings from high-income earners have been allocated to more than 190,000 children via trusts, to reduce wealthy individuals’ tax bills.

Wayne Swan then appeared to go out of his way to say the Government would look at the issues, which would suggest they’ve already done so. Experts expect tinkering rather than wholesale changes – the Government may look to lower the tax-free threshold at which money can be distributed from current levels of $3,333.

A reduction in FBT tax breaks for company cars

This idea has gathered steam in the last week. Currently, fringe benefit tax concessions for company cars are based around the amount of kilometres driven in a year, with thresholds at 15,000 kilometres, 25,000 kilometres and 40,000 kilometres. The more kilometres you drive, the bigger your tax break. But at the insistence of the Greens, Labor looks set to introduce a flat tax break, which would reward drivers who travel smaller distances. It’s a win for the environment and the budget bottom line, with savings of $1 billion predicted. Even better, the idea appears to have the backing of pretty much everyone, including accounting bodies and the automotive industry.

Cuts to health spending

As the Australian population gets older, health spending is going to become a bigger and bigger issue for governments. This year, Labor is likely to swing the axe at pathology spending (the Government will make $550 million in cuts over five years from pathology services costs thanks to a new deal with the pathology sector that will cap annual spending growth at 5%) and restrict the number of new drugs being placed on the Pharmaceutical Benefits Scheme. The health care sector will no doubt be waiting nervously for signs of further cuts on Tuesday evening.

More money for education

One area that is likely to see increased spending is in education. Last week, Prime Minster Julia Gillard announced a plan to pay top-performing teachers bonus payments of $5,400 and $8,100 depending on their experience, with the first payments to be made in 2014.

Further cash for vocational education is also likely, as the Government tries to get ahead of the skills crisis. One potential cut in the area of education could come from a slashing of the discount available to students who pay their HECS debt up front. Reports suggest the discount could fall from 20% to 10%.

Some longer-term problems

We often think of the Federal budget as an annual event, but it’s worth stepping backing and thinking about the sort of budgets successive governments have brought down. ANZ chief economist Warren Hogan and his team say it is not a pretty picture.

“For the past eight years the Australian Commonwealth Government has failed to save enough of the financial benefit from what now looks like being a ‘once in 200 year’ natural resources boom.”

“Not only does this mean that the Government has very little to financially show for this economic boom, but this lack of financial discipline has added to inflation pressures and imbalances in the economy at various times in the past decade.”

Ouch. But this is not just a missed opportunity – Hogan argues that the poor management is creating a new problem, with inflationary pressures now rising again and the Government needs to act.

“Without a substantive tightening of policy settings, the Government will leave itself open to the criticism that it added to upward pressures on inflation and interest rates. Getting the budget back to balance by 2012-13 is helpful and necessary but we suspect more is needed.”

It’s enough to make you dread the budgets that lie ahead.