A Budget prayer: Act, Act, Act

budget

This year’s budget prelude has seen the welcome dropping of the political rhetoric around Australia facing a “budget emergency”. But make no mistake, a real emergency will become apparent not far down the track if this budget dodges its central task of fortifying the economy against the pressures bearing down on it.

The Treasurer faces a very difficult task as he prepares a Budget in which he needs to find the right balance between providing near-term stimulus in a slow economy and making appropriate headway on the longer-term challenge of fiscal fortification.

On the surface there is a contradiction between calls for short-term stimulus and making the tough calls needed to put the budget on a sustainable footing. But this is only on the surface. One of the major reasons for having a strong budget position is that it enables appropriate stimulus when circumstances warrant.

There should be no question that current circumstances do warrant a degree of fiscal stimulus. Commodity prices have fallen steeply and the mining investment boom is fading. Real incomes are declining; investment is weak; output and employment growth are tepid at best and unemployment remains high.

Fiscal stimulus targeting higher business investment makes a lot of sense for 2015-16. A lot of sense. Business confidence and investment are the missing ingredients in the path to structural adjustment and more timely recovery.

Disappointingly, and notwithstanding the convincing benefits in terms of investment, productivity and employment, the Government is now not proceeding with the plan to shave 1.5 percentage points from the company tax rate. At least businesses with profits about $5 million no longer face the imposition of the investment-sapping Paid Parental Levy of 1.5%.

With the first best policy of cutting the company tax rate now off the table for the time being, what else can the Government do to boost business investment?

For small businesses, both incorporated and unincorporated, raising the amount that can be immediately written off for tax purposes would be a major step forward. A deduction of $6,000 for businesses turning over less than $2 million would simultaneously lift investment and reduce small business compliance burdens.

In addition, preferably for all companies, the withdrawal of the company tax cut should be offset by introducing a period of accelerated depreciation for investments in plant and equipment.

These measures in combination would lift investment, boost productivity and stimulate employment when these are precisely the outcomes the economy needs as it struggles to rebalance and overcome the legacy of a decade of low productivity growth. Critically, they would also help grow the tax base on which future revenue will be collected.

The importance of giving the ailing economy a shot in the arm should not, however, be allowed to push aside the need to make inroads into the emerging budget shortfalls stemming from the combination of demographic forces, escalating costs of healthcare and tax base erosion.

How can such inroads be made while still imparting an appropriate budgetary stimulus? It’s all in the timing. Measures can be announced and legislated well before they take effect. Areas of projected spending growth can be pared back and programs can be phased down over time. Done skillfully and explained well, such measures could be put in place without offsetting the desired near-term fiscal stimulus.

And it is not as if there is a need, this month, to introduce all of the measures needed to fortify the budget for the decades ahead. Indeed, if only one lesson could be drawn from last year’s Budget, the perils of trying to do too much must rank as a leading candidate.

But this same reasoning must not be used as an excuse to do nothing about these longer-term fiscal pressures in the 2015-16 Budget. There are always excuses not to act and it would not take much for a whole parliamentary term to be wasted. With every lost opportunity we hand-ball down the line the difficult decisions, the political risks and the escalating burden of inaction.

Governments who fiddle while Rome burns should be judged harshly and the same standards should also apply to oppositions, minor parties and indeed any parliamentarians who take a purely populist stance against sensible and responsible budgetary measures. We hear a lot about responsible government and too little about responsible opposition.

The Government has taken a step away from populism by dropping the “budget emergency” rhetoric and the Opposition has re-entered the policy debate with some suggestions on taxation measures. Next week, both the Government and the Opposition need to build on these steps and focus on the national interest by committing to the longer-term budget fix and the need to provide stimulus this year.

What does your business see as the top priorities for Budget 2015-16? Share your thoughts below.

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Innes Willox
Ai Group Chief Executive since May 2012, Innes joined as Director International and Government Relations in 2008. Prior to this he held a number of senior roles in both the public and private sectors: Australian Consul General to Los Angeles (2006-08); Chief of Staff to Minister for Foreign Affairs, Alexander Downer (2004-06); and Manager for Global Public Affairs, Singapore Airlines (2000-04). He began his career as a journalist, with his positions including Chief Political Correspondent and Chief of Staff at The Age.

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