This year’s federal budget was brought forward to allow the Federal Government to call a double dissolution election for 2 July 2016. The Treasurer’s opening sentence in the budget speech referred to extraordinary times. It was then logical for the next sentence to state that this was an economic plan and not just another budget. According to the budget papers, the economic plan is required to ensure Australia continues to successfully transition from the mining investment boom to a more diversified and strong economy.
It was a relief to hear that, for the first time in decades, the government was proposing to spend billions and raise billions more but it was doing so on the basis of an economic plan! The nation was getting an economic plan as part of the budget process delivered during a period that was described as representing extraordinary times – read an impending federal election.
Budget day indeed started with an interesting twist, as hours prior to the delivery of the historic economic plan, the Reserve Bank of Australia (RBA) made headlines not only for cutting the cash rate to a historical low of 1.75 per cent, but also for the fact that the RBA decision was the first interest rate cut decision announced on budget day. Technically of course, the RBA could well argue had the budget been delivered on the traditional second Tuesday in May, the decision to cut the cash rate would not have coincided with federal budget day.
The fact is the RBA announced the cash rate cut on budget day which in turn raises the following interesting question. Did the RBA move to boost consumer and business confidence knowing the budget may fail to provide the necessary boost to economic growth and confidence? While the RBA justified the interest rate cut on weaker than expected core inflation data following the deflation headline rate during the March 2016 quarter, the RBA decision also raised concerns that it may not have confidence in the overall budget’s ability to support and sustain economic growth.
This column will discuss the likely impact of the federal budget on the printing industry by reviewing some of the key budget measures announced by Treasurer Scott Morrison and assess the associated budget forecasts and what they mean for the printing industry.
Key budget measures
The centrepiece of the 2016-17 budget is the Federal Government’s ten year Enterprise Tax Plan. Commencing from 1 July 2016, businesses with annual turnover of less than $10m will pay a company tax rate of 27.5 per cent. The goal is to progressively lower the company tax rate so that by financial year 2026-27 all companies will pay a tax rate of 25 per cent.
A range of concessions available to small businesses with annual turnover of $2m or less such as instant asset write offs for equipment purchases of up to $20,000 that will be expiring on 30 June 2017, will now be extended to all businesses with turnover of $10 million or less effective from 1 July 2016.
To ensure all businesses are covered, and not just those in company structures, the tax discount for unincorporated businesses will also increase to eight per cent for businesses with annual turnover less than $5 million capped at $1,000. The discount for unincorporated businesses is planned to increase in phases reaching 16 per cent by 2026-27.
Modest personal tax income relief was also provided in the budget for average full time wage earners by lifting the 32.5 per cent tax threshold from $80,000 to $87,000. The measure is expected to benefit up to 500,000 taxpayers who will be prevented from paying the second highest tax bracket until 2019-20.
The announcement of an $840 million youth employment package with the key component the Youth Jobs PaTH (Prepare-Trial-Hire) programme aims to help up to 120,000 job seekers under the age of 25 secure jobs over a four year period. Stage 1 of the new programme involves pre-employing skills training; stage 2 involves internship placements with interns receiving $200 a fortnight in addition to their normal income support, while businesses participating in the programme will receive an upfront payment of $1,000 to host the interns. At stage 3, employers hiring eligible job seekers will be entitled to receive an accelerated wage subsidy ranging from $6,500 and $10,000 over a six month period.
To target tax avoidance by large corporates, the budget introduced a new Australian Diverted Profits Tax imposed at a rate of 40 per cent on multinational companies attempting to transfer their Australian profits to avoid paying tax locally. Other measures, such as the newly established Tax Avoidance Taskforce with the ATO, will target tax avoidance by large companies, multinationals and high income earners.
Superannuation changes targeting high income earners sees the introduction of a $1.6m transfer balance cap on the amount that can be transferred to tax-free retirement phase accounts; those earning more than $250,000 facing a 30 per cent tax on contributions; lowering the annual concessional contributions cap to $25,000 and introduction of a $500,000 life-time non-concessional cap. Changes aimed at encouraging savings include applying the same contribution acceptance rules for all individuals up to the age of 75. Individuals under the age of 75 being able to claim a tax deduction for personal contributions made to eligible funds, up to the concessional cap and individuals being allowed to claim a tax offset for contributions made to their low income spouses’ superannuation accounts.
The budget parameters
Budget estimates show government revenue as a proportion of Gross Domestic Product (GDP) rising from an estimated 24.0 per cent during 2015-16 to 24.2 per cent in 2016-17. Expenses over the same period are expected to rise from 26.1 per cent of GDP to 26.2 per cent of GDP. The fiscal balance is estimated to improve from -2.4 per cent of GDP in 2015-16 to -2.2 per cent during 2016-17. The following chart depicts federal government finances since 1998-99 and the challenge of ongoing fiscal consolidation.
Economic growth as measured by real GDP is forecast to remain below trend during the 2016-17 financial before rising to near trend growth during 2017-18. Both external (China) and internal (rebound in non-mining investments) developments will determine whether the higher economic growth forecasts will be achieved.
A key driver of printing industry growth, household consumption, is forecast to grow at its current rate of three per cent over the next two financial years. Total business investment is forecast to be boosted by the Enterprise Tax Plan. Exports are forecast to remain robust but imports are forecast to start lifting from the 2016-17 financial year. As a consequence net exports contribution to economic growth will start falling from financial year 2016-17.
Nominal GDP which influences tax revenue is forecast to grow 2.5 per cent in 2015-16 before rising to a growth rate of 5.0 per cent in 2017-18. This is clearly an optimistic forecast with serious consequences to budget revenue projections and ultimately the budget bottom line if the forecasts fail to materialise. Price and wage movements are forecast to register modest increases with inflation continuing to remain well within the RBA target range. Employment growth is expected to be slightly weaker but surprisingly the unemployment rate is forecast to be reduced to 5.5 per cent in 2016-17.
The terms of trade prices which measures the prices Australia receives from the world from the sale of its exports relative to the prices it pays on its’ imports is expected to improve during the 2016-17 financial year. Any improvement in the terms of trade will help increase national income. Ongoing volatility and uncertainty over commodity prices could mean some of the key budget assumptions that underpin the economic forecasts may not be met with consequences for nominal GDP. Future movements in spot prices for iron ore, metallurgical and thermal coal as well as the Australian Dollar will influence and determine both economic growth and budget parameters.
Impact on the printing industry
For the printing industry, the corporate tax changes represents a win-win outcome as businesses operating within both company structures as well as in the more common unincorporated structures will be receiving and benefiting from business tax cuts.
Other concessions such as the instant write-off for business assets of $20,000 or less will now be extended to more printing businesses following the increase of the eligible turnover level to less than $10m.
Very modest income tax relief for average income earners is estimated to return close to $4bn in bracket-creep money over the budget forward estimates. With 80 per cent of tax payers not benefiting from this return of bracket-creep measure the impact on the printing industry is likely to be at best negligible.
The newly announced Youth Jobs PaTH program will provide interested printing companies access to young job seekers with participating companies receiving wage subsidies and other government financial incentives.
A concerning aspect for printing businesses is that overall economic growth is forecast to remain on par with current rates of growth during the upcoming financial year rising to near trend growth levels within 18-24 months’ time. Household consumption expenditure a key economic growth driver for the printing industry is forecast to grow at modest rates implying no added economic boost for the printing industry.
Printing businesses should derive some economic benefits from the outlook on costs with both inflation and wage increases expected to remain modest. For an industry that finds it difficult to increase prices, let alone easily justify them, and given wage costs continue to account for the highest production cost component after paper costs, moderating cost pressures are a welcome development for printing businesses vying to improve their margins to make them more sustainable.
While tens of billions of dollars have been allocated over the forward years for areas such as infrastructure and significant amounts will also be spent on defence projects over the next two decades, these expenditure growth areas will at best generate negligible positive impacts on the printing industry due to the fact that these sectors consume little printing industry products or services.
Conclusion
A redeeming feature of the 2016-17 federal budget is that it does not detract from overall economic growth and a number of the budget initiatives if passed by the upper house should provide modest boost to economic activity during the medium to long term. Treasury has estimated that the corporate tax changes should help lift GDP by one per cent over the decade. This represents roughly a $160 billion economic benefit compared to an estimated economic cost (revenue forgone) of approximately $50 billion over the same time frame.
Most of the identified economic benefits are expected to materialise when the corporate tax reductions are extended to large businesses since it will be these businesses that will attract foreign investments and create noticeable job growth. The problem is that the corporate tax changes for large businesses do not currently enjoy universal political support with the opposition indicating that it will only support the corporate tax cuts for small businesses with annual turnover of $2 million or less.
The 2016-17 budget was presented in terms of an economic plan aimed at helping the Australian economy makes the successful transition to a more diversified economy. The budget measures announced are generic in nature with no targeted support measures for industries facing ongoing industry transition issues and pressures such as the printing industry. If they fail to provide the printing industry with sufficient economic stimulus then the government’s economic plan will fail to provide the required economic boost to help revitalise the printing industry.
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