A once in a lifetime budget

Grant Thornton: A Once-in-a-lifetime Budget

Velvet-Belle Templeman

Welcome to Grant Thornton's Navigating the New Normal podcast series.  My name is Velvet-Belle Templeman, and I'm here talking to Vince Tropiano, Tax Partner at Grant Thornton and Phil Coorey, Political Editor at The Australian Financial Review.  Today, we're talking about the federal budget.  Thanks so much for joining us Vince and Phil.

Vince Tropiano

That's a pleasure Velvet-Belle. 

Phil Coorey

No worries, Velvet.

Velvet-Belle Templeman

Now this was hyped up as a once in a lifetime budget, a job maker a budget.  Did it deliver?

Phil Coorey

Well it's way too early to determine that because the aim of the budget was to create jobs.  So we'll have to just keep an eye on the unemployment figures over the next few months and years.  Look, it won't be the end of the effort.  I mean, there's another economic statement due out in December, and then there's another budget in May next year before we go to the election.  So probably by then, we'll have an idea as to whether it is working or not.  And if it's not, the government will have ample opportunities to make changes or introduce new measures.

Vince Tropiano

Certainly, circumstances seem to have made it a once in a lifetime budget, and you’d hope that we don't get this sort of scenario again and I think Phil's right.  I think it's still a bit too early to say, but obviously there's examples there of some spending and stimulus measures that should assist the economy sort of trading its way out of the current circumstances.  And there's some other things in there, certainly from a tax perspective, where I see some benefits with the instant asset write off and the like, and then supporting industry and supporting business with the subsidies for the hiring of under 35s, jobless.  So I think there's some green seeds there, but it'll still be too early to tell how this is going to play out.

Velvet-Belle Templeman

Tax reform and streamlining regulation was supposed to be a key feature of the government's response to COVID, wasn't it?  Now correct me if I'm wrong, but I don't think I heard much about reform last Tuesday.

Phil Coorey

Well, there was a bit of, there was a fair bit of deregulation in there.  The changes to the insolvency laws and the relaxation of the credit rules for banks though, the responsible lending obligations, which Labor brought in after the GFC, the government wants to unwind those.  So there's a little bit of dereg, we're waiting to see more by the end of this month, early next month on industrial relations.  But again, it won't be a big thing because the Prime Minister is not an ideological sort of person.  He's not going to do anything like Work Choices and he's aware that he's trying to build a consensus for change.  So we'll probably see some fiddling around the edges, but you're right.  It wasn't, it wasn't supposed to be a reform budget.  It was just a fairly crude exercise in job creation in all those measures that Vince just described, the investment allowance for business and so forth.  So again, you know, if they do want to have a crack at reform, there's a big chance before the next election, although reform by its very nature, tends to be politically difficult.  So I guess if the government is not prepared to have a crack at it this far yet, I doubt they're going to do anything crazy, brave or otherwise closer to the election, which could well be this time next year.

Vince Tropiano

And from a tax perspective, there wasn't any big bang tax reform.  There was a little bit of tinkering at the edges ostensibly the reducing red tape and support small business.  Some of the small business tax breaks, the threshold had increased from $10 to $50 million turnover.  There's also some FBT relief for entities up to $50 million turnover, but it wasn't the sort of big announcements we would hope for.  And maybe that is also a function of the circumstances that maybe this wasn't the time for some massive tax reform and really changing things up. 

But we'd hope to see that with the next budget and various other announcements, but it really didn't come through last week.  From a tax perspective, there wasn't any great reductions in complexity or any other simplifications of note that would assist business in, in getting on with business in this environment.

Phil Coorey

One of the government's concerns from a political and economic point of view, if you do do a reform, let's say the most commonly advocated one is you lower the company tax rate, and the investment allowance in the budget was clearly a big down payment or an alternative to that.  There's always going to be some sort of revenue offset.  And people always point towards increasing the GST to fund more efficient taxes.  The trouble is right now, a lot of people are out of work and so increasing the price of things would just be politically mad, but also even if you were to flag some sort of reform down the track, I know this for a fact that the government thinks if you were to forecast an increase in a tax, even in a year's time, that would shatter what's left of confidence.  So that's another reason or they just don't want to go down that road.  Serious tax reform, I think, you know, whether it's wrong or right, really requires the economy to be doing fairly well.  If it's not doing fairly well, then it's really hard to create losers when there's already so many.

Vince Tropiano

Look, I think that's right, Phil.  And your point about the company tax rates is an important one though.  Interestingly enough, there's been a lot of change in this budget with personal income tax rates and as it currently stands, personal income tax still makes up, I think the biggest part of government revenue.  I think it's about 40 something percent.  Whereas I think company tax rates are around the 19-20% mark.  So, you know, we're always advocating for reduction in the company tax rate from a global competitiveness stage, if nothing else, compared to our major trading partners and the like and to encourage more business development.  So I think in this environment where there has been some fairly drastic surgery and bringing forward the personal cuts, given the size of the deficit and the like that consideration can still be given to looking at reducing the company tax rate and for a larger group than simply the $50 million turnover and below. 

We advocate a lot for midsize business, which is anything up to say $500 million and that's an area that's really crying out for some greater support.  So, you know, I think your point is right, that it's difficult for some real tax reform in the current circumstances.  But I do think that there are some other opportunities and there's still some things that we need to keep on the table.

Velvet-Belle Templeman

Then of course, we had the opposition deliver their response to the budget last Thursday.  Anthony Albanese committed to spending $6.2 billion to remove caps and increase rebates for childcare if they were to come into office.  Childcare wasn't something in the government's budget.  Was there much else different?

Phil Coorey

Look, most complaints about the budget were over things that weren't in there.  No one really complained about the stuff that was in there.  In fact, it raced through the Senate quicker than I can ever remember a budget doing because it shows it was actually more a Labor budget than a Coalition budget. Childcare is an interesting one.  I mean, the government made it free for several months during the worst part of the lockdown and I think what they feared came to pass is that people quite got used to the idea of it being free and wanted it to stay that way, even though it was made very clear at the outset that wouldn't be the case.  They actually did have a look at trying to keep it free before they brought back in the existing system of the means tested rebates and so forth, but it’s just way too expensive. 

We can see even the opposition didn't go that far.  The $6.2 billion is about $2 billion a year, it sort of tweaks the percentage of the subsidies that people get back.  But the big one is removing that cap of $10,500, which people sort of tend to hit two thirds or three quarters of the way through the financial year and then you're paying full freight through to the end of the financial year and that can act as a real disincentive for one of the people to go back to work, which is often the woman.  So from a productivity point of view, it was a good measure, I think, but it does come at a cost and I notice the government is attacking it along the lines that it delivers a high income family, the same break that the stage three tax cuts would deliver, about $11,000 a year, so I don't see the government going there, but they might back flip because it is a big issue.  And they do have a tin ear, I think as government to the female vote, the Prime Minister's office is very bloke heavy.  They're not anti-women, but I just think sometimes they just don't see the full picture and Labor did what they did for a reason. 

Vince Tropiano

As a firm, we'd lodged a pre-budget submission back in August outlining some of the things that we would like the government to consider as part of the budget.  And interestingly enough, the additional investment in childcare was one of the platforms in our submission.  So I was kind of delighted to see what the opposition leader put forward last Thursday night, because it is something which we had considered would be supporting local workers and therefore also supporting local business.  So that was certainly a positive for us.  What happens with it as I guess, Phil has been talking about it in the political environment is an interesting one.  But that was certainly something that was pleasing to us, that it's on the table as a discussion piece.

Velvet-Belle Templeman

Now the big spending seems to be transformative for the economy, we're talking sovereign capability, not just global connectivity.  What are your thoughts on their new focus areas, being modern manufacturing, renewable energy, and a digital economy?

Phil Coorey

I reckon this is the sort of most under discussed aspect of what's been going on, not just in the budget, but in the last couple of years, is just the outright level of intervention now in once, the former free market, if you like.   I mean in the energy sector the market has clearly failed consumers.  So there's been the need for some sort of intervention.  I mean, that's what happens when you privatise services that are as essential as oxygen and then try and connect it up into some national grid infrastructure, which works on paper, but not in reality and so you've got all sorts of adverse things, mainly really expensive power prices.  And governments, even though they've sold off these assets, still get the blame.  But that intervention we’ve seen in the energy sector, I think is now sort of everywhere.  Basically, we had the Prime Minister in the lead up to the budget, the government picked winners in the manufacturing sector.  Nominated six areas of advanced manufacturing in which Australia had either a comparable or a competitive advantage and said, that's where we're going to direct incentives. 

And when you couple that with them also sort of saying, this is the energy future we envisage, which is largely gas all down the East Coast until if, and when renewables are reliable enough.  It is, I mean, you could sort of say a little of say the attractor factor isn’t it, you build this using this energy source and it hasn't gone un-noted inside the Liberal party.  But at the same time, there is just, there's an economic need for this stuff.  And you talked Velvet, about sovereign capability, that's the bit that we haven't discussed as much.  Yes, there's a need to manufacture things again and the COVID crisis has exposed shortcomings and our ability to provide certain critical products, especially in the health area.

And I think you can safely guarantee they will be made here from now onwards and the government will effectively subsidise that by using its procurement and then the state and federal governments will buy the locally made stuff.  But it is a bigger worry too, with China, and this goes back to the defence speech the Prime Minister gave a few months ago that we're just going to have to maybe get to the stage here where we're going to have to make stuff, not just to secure supply lines and stuff, but just for our own strategic interest as well, even if that means paying more.  No-one’s talking about building cars here again or anything like that, but certainly you can't rely, and COVID has exposed that, you can't rely on the free flow of goods around the world as we once did. 

Vince Tropiano

Look, I think that's right.  I mean, we've done some research, looking at contribution to GDP and government spending in certain industries over the last 10 years and we're about to release a report on that and manufacturing, which is no great surprise, contribution to GDP is reduced from something over 6% down to just over 4% in the last 10 years.  And certainly, we've seen among our client base and just generally, you know, a reduction in local manufacture as the cost of doing business in Australia continue to go up and, you know, companies started to drift away the offshore locations or shut down altogether.  And as Phil has said, the pandemic has exposed weaknesses in our supply chain and really showing our over reliance on overseas manufacturing. 

So I guess strategies and concessions and support for local manufacturing, move back into local manufacturing.  We'd certainly see that as a big tick.  It's never going to get back to the areas probably as Phil said, we're not going to be making our cars as much in the like, but some of the other more important or necessary items, certainly we would support that.  The discussion around some of the other areas, you know, increased spend in renewables, again, a big tick and certainly increased spend in respect of the digital economy are great positives that we would see as being compulsory for this government and the next to continue to support moving forward.

Velvet-Belle Templeman

Now Phil, you've sat in on every update in Canberra.  You've witnessed the interplay between state and federal and at one stage they were getting along really well.  Where does the power for change and to grow out of the recession really sit and will everyone continue to play nicely when the health crisis is gone?

Phil Coorey

Answering your second question first.  No, they’ve already stopped playing nicely.  As I'm speaking to you, the Prime Minister is up in Queensland for a week, ostensibly selling his budget but there also happens to be a state election up there in a couple of weeks and he's quite popular up there and he won't say it publicly, but they know that's going to help Deb Frecklington up there, the opposition leader, so Anastasia Palaszczuk won’t be too happy about that.  We've already seen the tensions with Victoria as well, playing out.  

Look the power for change to grow out of the recession is going to rely on both the states and the Commonwealth.  They're both going to have to pull in the same direction.  The National Cabinet, I think, has been a really good idea and just because they're not getting on so well at the moment that actually makes it even more important because there's nothing better than forcing everyone to sit in the same room, even if it's over laptops, every couple of weeks or every month and talk. I mean, everyone's got the same agenda here and that's to try and fix the joint.  There's just differences of opinion on what's the best way of doing it and partisanship always comes into it. 

But you know, this thing has really exposed the flaws in Federation.  Just the powers that the states still have; we’ve probably largely forgotten they did have, they haven’t exercised them for a hundred years and we’ve seen politically motivated border closures that have caused massive economic damage.  We've seen the stuff down in Victoria, which if you're sitting outside of Victoria is just inexplicable to watch the absolute disregard for the economy down there by the government.  They've got their cases down there now to a manageable level, levels that other states are managing quite well with their contact tracing and testing systems, but this stubborn refusal there to let up and pursue essentially an elimination strategy is going to cause massive damage.

It's already caused massive damage to the economy down there and it's going to cause even more.  So certainly, there's nothing we can do about that, the Commonwealth can only work with it.  But you know, it wouldn't have been such a problem if it was the Northern Territory or South Australia.  When it’s a state that constitutes 25% of the national economy, it's a problem for all of us.  So hopefully Victoria gets its act together.  Hopefully they move to back to the suppression strategies that the other seven states and territories have been using quite happily for many months, and the politically motivated border closures in WA and Queensland, get replaced with a much more efficient and equally safe national hotspot definition scheme.  Then we can pull ourselves out of the recession, but as long as politics is politics, no one is ever going to play nicely when there's advantage to be gained at the expense of someone else.

Velvet-Belle Templeman

Both federal and state have a hand in creating jobs and we've yet to hear from the states other than WA, who handed down their budget last week.  So sticking with federal will initiatives like the JobMaker Hiring Credit really promote the creation of new jobs and what about the other tax measures and business incentives?

Vince Tropiano

I think the, the job maker hiring credit will help.  I mean, at this point in time and you know, you don't need to be Nostradamus, take a walk around and see how many businesses are struggling.  A lot of it just has to do with cashflow.  They're not making sales, they're struggling with just carrying on business.  So anything which assists and supports them to employ people, encourages them to employ people and try and get back on an even keel must be a positive.  In terms of some of the other tax measures and we’ve briefly mentioned them before, I think some of them are really positive.  The instant asset write off again, will help with encouraging business to invest in their businesses to try and kick back along.  The loss carryback provisions which were introduced I think is a real positive there in terms of companies being able to a clawback tax paid in an earlier year to wash against losses generated in the current year.

I think that's something that is around in a number of countries overseas.  And we've had it here once before, back in 2013 for a year or two, and I think that was a positive step.  And the other one, which we haven't spoken about is reversal of some of the R&D cuts, which had previously been announced, the government's taking another look at that and deferring those.  And I think that's an important one in terms of how we want to set up the economy moving forward and the need to protect our R&D.  Look at keeping our R&D and developing R&D on shore.  And that goes to the point that Phil and I were talking about before, in terms of, you know, local manufacturing, smart manufacturing, and all those other things.  An important part of that is to support local R&D. So I think all of those issues are certainly positives. 

Phil Coorey

Yeah, I agree with Vince.  They were all targeted, they were all, as we said earlier, just pretty crude measures to create employment and generate private sector activity to create that employment.  None of this is new.  I mean, these measures, you know, were all part of Paul Keating's 1992 One Nation Package to get us out of recession.  A good package, it just came too late, they should have done it a year or two earlier.  A lot of these measures again, were used by Labor around the GFC.  So there's sort of off the shelf, recession busting policies, which get wheeled out when we need them and they’ve worked before just they can be better nuanced.  I mean, I was long term unemployed in ‘92, in my mid-20s and I was the benefit of one of these JobMaker hiring credits, it was called Job Starter back then.  There is a bit of waste involved with them.  They can have this thing called additionality and that's where an employer might be taking someone on anyhow and they think I'll just take it, they don’t need the credit, but they’ll take it because it's there.  But that's just a fact of when you put a lot of money into something really quickly, you’re always going to get a bit of that.  But by and large, they do work and the advantage of them is they can be targeted towards age groups, just as we've seen in this instance, even specific sectors.

Velvet-Belle Templeman

Now, Vince, you've been working with corporates for decades.  Would you have done anything differently?

Vince Tropiano

Well, I think I've already spoken about some of the things we would've liked to have seen and talked about the contribution of personal tax versus company tax as part of government revenue.  And I'd still be pushing for fast tracking some of the corporate cuts and extending the corporate cuts up to midsized business as well, extending it beyond small business.  I think that's something that we need to consider even in this environment again, a couple of areas.  Supporting those businesses to grow, providing them with some extra cash and some extra capital and also the global competitiveness.  It's shown that we've suffered in the global economy in terms of our inability to manufacture products here.  The cost has been too much and we've lost a lot of that.  I think we need to do what we can to try and bring some of that back and reducing the costs on local business is one of them.

So I think that's something that is still an important platform.  I really liked the loss carryback provisions, as I said, it's something we've had before and we've brought them in.  The UK have had them for ages, I think New Zealand have just brought them in.  OECD have been talking about this as some good tax policy for business.  So I'd like to see those brought in permanently because currently it's a temporary measure to go for a few years, but I think that's something that I think the government should continue to track and it's something that I'd like to see them bring in on a permanent basis.  So they're probably a couple of the bigger areas.  Some of the other stuff like the instant asset write off is fantastic.  Whether that's something that could continue at that level forever is probably unlikely but I think that's a great support at the moment.

Velvet-Belle Templeman

So far, we've been talking about cash flashes and cuts to support businesses and households through the recession, but there were no tax hikes.  And it's been said, net debt could reach close to a trillion dollars before the economy is stabilised.  How do we go about paying that down?

Vince Tropiano

I'm not sure that it's going to be paid down any time soon.  I guess the philosophy here and Phil's spoken about it is that all these measures are encouraging business to grow, encouraging people to spend, and that'll kick the economy along.  I think on the other side of it, because there's always that carrot and stick.  I think on the other side of it, putting my tax hat on, you know I acknowledge the government needs to pay for all this.  So we're expecting to see substantial ATO activity, ensuring that even in this scenario and companies that are struggling and the like, they’re going to look to see that they're paying their right level of tax, or there already is a raft of ATO reviews in respect of JobKeeper recipients.  We're also seeing a number of the ATO audit and review programs, which have been put on hold for the last six months or so while their resources have been focused more on JobKeeper, but they're starting to kick back up later this month and next month in terms of tax risk reviews as a top 5,000 program, getting down into the private companies and looking at their tax position.

So we're expecting that certainly over the next six, 12, 24 months, that there'll be renewed ATO activity to ensure that, I guess, put it bluntly, do what they can to balance the books. 

Phil Coorey

Yeah.  Look, they're never going to pay down this debt, not in our lifetime, probably.  I mean the government's philosophy is grow the economy and that's why they haven’t increased taxes.  The Liberal philosophy is grow the economy, generate economic activity that generates revenue and then that gets the budget back under control.  They'll pay the deficit down probably in 15 or so years, maybe, assuming nothing else goes wrong and the world recovers.  But I think, I don't know, Vince, I think the only time debts like this have ever disappeared is when there's been a world war, they would just get written off.  Not that we're advocating that, but look this is just uncharted territory for us.  To have net debt at a trillion, let alone gross debt, is quite frightening, even though money's cheap at the moment, it's not always going to be cheap.  So I suggest there will probably be a greater urgency towards debt and deficit when and if rates ever start to rise bearing in mind, the government said debt and deficit, isn't their priority anymore under their new fiscal strategy.  The strategy is to get unemployment down below 6%, which according to the budget won't happen until 2023/24 and only then will the focus turn towards debt and deficit reduction.  But I suggest respectfully that’s going to be someone else’s problem, no one in this parliament. 

Velvet-Belle Templeman

Now, it hasn't been announced, but I think the smart money is on the budget returning to its usual cycle in May next year.  What's your take on when the next budget will be handed down and what might be in it?

Phil Coorey

Good question.  It'll definitely be handed down in May, there is, remember MYEFO, the Mid-Year Economic and Fiscal Outlook.  That's always released around December and that's meant to come at the six month period between the May budgets.  So we're still going to have a MYEFO in December, so in two months’ time we'll have that.  Now they can always be used if need be as a mini budget.  So if there's, as we said at the outset, if some of these measures need to be tweaked or added to, or new ones introduced, they can do that at MYEFO.  But the big one, the big kahuna will be in May.  Now that will be important for a couple of reasons, i.e. because you know, obviously the economy won't be in much better shape than the same now.  So budgets have a much bigger resonance to them now than they did just a year ago, but it will probably be a pre-election budget too.

The government has to go to an election sometime between sort of October/November next year and early ’22.  They haven't made their mind up yet, but they're looking at all the options as a prudent government would do and they will go when they think they've got the best chance of winning.  So if the economy is starting to recover strongly and there are good signs I suspect they'll go earlier than later, towards Christmas next year and that's why that budget will be very important to try and sort of accelerate economic growth.   The view around in Canberra is that if Australia has sort of gone backwards or stagnated, and it's still largely a welfare state, that will benefit the Labor party, the Coalition has to, you know, look, I think they’ll win anyhow, because the sort of stampede towards incumbents in a crisis, but nothing's guaranteed and they'll want to be showing results.

You know, the unemployment rate coming down, growth on the way back, businesses opening.  And even if it's off a low base, it doesn't matter, if things are moving in the right direction.  And so that budget will be very important as both an economic document and a political document. 

Vince Tropiano

Yeah, I'd agree with Phil.  I think it will be May, and in some ways, I see it as like stage two or stage three of the recovery plan.  If you take into account, MYEFO, the opportunity to look at the current measures, to see what's working, see whether there needs to be some further stimulus measures or whether some of the ones which have been introduced need to be tweaked, you know, similar to JobKeeper.  We had JobKeeper, and then JobKeeper 2.0, you know, announced within three or four months.  So I think given the current environment six months before the next budget is probably not a bad time for it to happen.

Velvet-Belle Templeman

Vince and Phil, thank you for your time.

Phil Coorey

A pleasure.

Vince Tropiano

Thank you, Velvet-Belle.

Velvet-Belle Templeman

You can find further information on how COVID-19 might affect your business and assistance is available to you on the Grant Thornton COVID-19 Hub at www.grantthornton.com.au/covid19.  If you liked this podcast and would like to hear more, you can find and subscribe to Grant Thornton Australia on iTunes, Spotify, or SoundCloud, I'm Velvet-Belle Templeman, and you're listening to Boardroom.Media.