The Prime Minister promised, and the Treasurer has now delivered, a ‘dull’ budget for the year ahead.

In the context of fiscal policy, ‘dull’ means nothing that will overly concern the electorate or undermine consumer or business confidence. There are a few winners and some losers, but little that can be classified as ‘unfair’ or that is likely to get the sort of furious response we saw following the 2014 Budget night announcements.

However, ‘dull’ also means that there is no medium to longer term strategic thinking about how the Budget can eventually be returned to surplus. This will inevitably require political resolve and an understanding by the electorate that there is no silver bullet to solve the problem.

BUDGET 2015–16Building confidence or castles in the air?

PAGE 2 OF 6BUDGET 2015–16  Building confidence or castles in the air?

-6%

-5%

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-3%

-2%

-1%

0%

1%

2%

3%

-$60,000

-$50,000

-$40,000

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-$10,000

$0

$10,000

$20,000

$30,000

2000

–01

2001

–02

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–03

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–04

2004

–05

2005

–06

2006

–07

2007

–08

2008

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2014

–15(

e)

2015

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e)

2016

–17(

e)

2017

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p)

2018

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p)

Budget Position ($AUD) - LHS % GDP - RHS

Small business a winner; Fiscal adjustment loses out

TheTreasurerhasannouncedaBudgetdeficitof$35 billion,or2.1%ofGDP,for2015–16,downfrom$41.1 billion(2.5%ofGDP)in2014–15.The2015–16Budgetispitchedas‘responsible,measuredandfair’,withaBudgetsurplusprojectedtoreturnby2019–20andtheeconomyshiftinguptotrendgrowthin2016–17.Thekeymeasuresannounced–taxandinvestmentbreaksforsmallbusiness,andchildcareassistance–aredescribedas‘redirectinggovernmentspending’ratherthanunfundednewinitiatives.Inparticular,$7.4billioninsavingsisduetotheabandonmentofthePaidParentalLeaveScheme.

However,realgrowthinexpenditureisforecasttoincreaseoverthefouryearsoftheforwardestimates.Onaveragetheincreaseisamodest1.1%perannum,butthismarksasignificantriseto3.3%by2018-19.Spendingwhenmeasuredasapercentoftheeconomyisprojectedtodriftalittleloweroverthenextfouryears,from25.9%to25.3%.Thisisstillquitehighbyhistoricallevelsand,givenpopulationtrends,isanunsustainabletrendoverthelongertermgiventhecurrentrevenuebase.TheimpactofthecollapseincommoditypriceshassignificantlyerodedGovernmentrevenuesfromthecorporatetaxbaseaswellastaxesfromincomeandsuperannuation.Sincelastyear’sBudget,totalreceiptsareprojectedtobesome$50billionloweroverthefouryearsto2017-18.

YettotalreceiptsasapercentofGDPareanticipatedtorisefrom24.0%ofGDPin2015–16to25.2%in2018–19.ItisunsurprisingthenthattheTreasurerhasnotedthat‘moreworkneedstobedone’tolowerspending,foreshadowingthat–whilemosthaveavoidedmuchpainthistimearound–theBudgetadjustmenttaskhasalongwaytogo.Soonerorlater,somepainis unavoidable.Intheshortterm,however,thefocuswillbeonthenewestinitiativesannouncedbytheGovernmentinthe2015-16Budget.WithchildcarebenefitsnotcomingintoeffectuntilJuly2017,thechiefthrustofnewpoliciesisdirectedatsmallbusinesses.

Underlying Federal Budget position

Mill

ions

1Budget highlights

SMALL BUSINESS MEASURES

From1July2015: § Thetaxrateforcompanieswithannual

turnoveroflessthan$2millionwillbeloweredfrom30%to28.5%atacostof$1.45billion.

§ Forthemajorityofsmallbusinessesthatarenotrunascompanies,anannual5%taxdiscount–upto$1,000–isintroducedatacostof$1.8billion.

Effectiveimmediately: § Smallbusinessescanclaimupto$20,000as

animmediatetaxdeductionforall purchases.Othermeasuresinclude: § Startupcostsfornewbusinessescanbe

immediatelydeducted. § Employeeshareschemeswillnotattracttax

untilthebenefitisrealised § FBTnolongerappliestoanyportable

electronicdeviceusedforwork.

BudgetPosition($AUD)-LHS %GDP-RHS

PAGE 3 OF 6BUDGET 2015–16  Building confidence or castles in the air?

EXPENDITURE

SMALL BUSINESS PACKAGE - $5.5 billionIncludesaccelerated depreciationmeasureswillliftthethresholdforanimmediatetaxdeductionforallindividualassetsbetweenthevalueof$1000and$20,000.Thismeasurewillleadtoacosttorevenueof$1.8 billion.SmallbusinesswillnolongerneedtopayFringe benefits taxonportabledeviceslikelaptopsandtablets.Thegovernmentbelievesthiswillleadtoanunquantifiablecosttothebudget.Alsoincludesa1.5%corporatetaxratecutforbusinesseswithturnoveroflessthan$2millionanda5%taxcutforsmallunincorporatedbusinesses.

FAMILIES PACKAGE - $4.4 billionA $4.4 billionFamiliesPackagewasannouncedwhichwillbemadeupofanewChildCareSubsidymeasurecosting$3.5 billionandan$869 millionChildCareSafetyNettoassistvulnerable,disadvantagedandadditionalneedschildren.Bothmeasuresarescheduledtocommenceon1July2017.

HELPING AUSTRALIANS INTO WORK - $370 millionIncludesnewyouthunemploymentstrategyworth$330million.Fourexistingwagesubsidyprogramswillbeconsolidatedintoasinglenationalwagesubsidypooltoencouragesmallbusinessinhiringjobseekers.Thewaitingforthedoleperiodforunder25yearoldshasbeenreducedfromsixmonthstofourweeks.

NORTHERN AUSTRALIA INFRASTRUCTURE FACILITY - $800 millionGovernmentwillcreateaconcessionalloanfacilitytostimulateprivateinvestmentinNorthernAustralia.Itwillhaveacapacityof$5billion.

Alsoincludes$100milliontoimprovecattlesupply chains.

DROUGHT ASSISTANCE - $270 millionExtensiontocurrentdroughtassistanceprogramsincludingthedrought-specificconcessionalloanschemesandextendedaccesstosocialandmentalservicesinaffectedcommunities.

WELFARE TRANSFORMATION PROGRAM - $60 millionAninitialinvestmentof$60 milliontoupdatethewelfare payment systemwillhelpincreasecapabilitiestodetectanddeterwelfarefraudandensurefairer benefits.

COUNTER-TERRORISM MEASURES - $450 million$450 millionwillbespentonnew intelligence measuresincludingnewITandtelecommunication capabilities.

FOREIGN AID + $1 billionForeignaidwillagainfacesignificantcuts.

WELFARE INTEGRITY MEASURES + $1.5 billionIncludesremovalofdouble-dippingfrombothgovernmentandemployerparental-leavepay.ThegovernmentwillreclaimHECSdebtfromAustralianslivingoverseas.SavingwillalsocomefromincreasingtheDepartmentofHumanServicesfraudpreventionanddebtrecoverycapabilityandimprovingassessmentprocesses.

PAID PARENTAL LEAVE SCHEME + $7.4 billionAsthegovernmentabandonsthescheme,fundsallocatedunderlastyears’forecastshavefreedup.

REVENUE

MULTINATIONAL TAX AVOIDANCE N/AGovernmenttointroducenewlawstotargettaxavoidancebyapproximately30multinationals.Measuresincludeatargetedavoidancelaw,newpricingdocumentationstandardsandstrongerpenaltiesfornon-compliance.Thegovernmenthasnotreleasedestimatesoffuture revenue.

GST EXTENSION + $350 millionGSTappliedtodigitalproductsandservicesfromJuly 2017.

GST COMPLIANCE PROGRAM + $445 millionGovernmentintendstoextendtheprogramtopromoteGSTcomplianceby3years.

2Key measures+ and - represent the change to net budget position

PAGE 4 OF 6BUDGET 2015–16  Building confidence or castles in the air?

55+45 16+84

Thereturntosurplusby2019-20isbasedonanumberofboldassumptions: § Anironorepriceof$48/tonne-whileadmittedlyhardtoforecast,initsownwords

thisassumptionis‘risky’fortheGovernment–forevery$10/tonnefallinthespotprice,revenueswillfallby$2.1billionin2015-16and$4.4billionin2016-17.

§ Theoutlookforrealwagesandemploymentgrowthremainsverymodest,buthouseholdconsumptionisforecasttopickup,implyingafurtherdeclineinhouseholdsavings.

§ Residentialinvestmentwillcontinuetogrowstronglyoverthenexttwoyears. § Non-miningsectorinvestmentwillpickupto4%intheyearaheadand7.5%the

followingyear. § Thetermsoftradewillstarttoincreasefrom2015-16.Iftheseforecastsarenotmet,thenrevenueandexpenditureprojectionswillalsofallshortofexpectationsandthesurpluswillrecedefurtherintothedistance.

TheGovernmentforecastsGDPgrowthof2.75%in2015-16.Keycomponentsare:

FOCUS ON RETAIL

Smallretailbusinesseswillbenefitfromchangestotaxratesandaccelerateddepreciationallowances.TheBudgetisunlikelytohaveasignificantimpactontheretailsectormorebroadly,however.TheBudget’sownforecastsareforamodestpickupinhouseholdconsumption(abroadermeasurethanretailsales,includingforexampleservicessuchashealthandeducation)overthenexttwoyears.Thismodestgrowthcomesfromagentleriseinemploymentbutwithlittleincreaseinrealwages,requiringsomedrawdownof savings.TheBudget’sabilitytorestoreconsumerconfidencewillbethemostcriticalfactordrivingspendingintheshorttomediumterm.

Overthenextthreeyears,theminingsectorwillcontributejust16%tooverallGDPgrowth,comparedwith55%overthepreviousthreeyearperiod.

Previousthree years: Nextthree years:

é 2.75%

ê 8.5%

6.5%

é 6.5%

é 5%

é 2.5% é 2.5%

ê 7%

é 1.5%

Household consumption Theeconomyisexpectedtogetamoderateboostinhouseholdconsumptionin2015-16,pickingupfurtherin2016-17.

Terms of trade Thetermsoftradeisexpectedtodeterioratein2015-16onthebackoffallingcommoditiesprices,beforestabilisingin 2016-17.

Unemployment rate Unemploymentisexpectedtodeterioratefurtherin2015-16,beforeimprovingslightlyin 2016-17.

Dwelling investment Dwellinginvestmentwillremainhealthyin2015-16,beforetaperingoffslightlyin2016-17.

Exports of goods and services Exportswillbeakeycontributortogrowthinboth2015-16and2016-17.

CPI Consumerpricesareanticipatedtoincreasemoderatelyin2015-16.ThisisinlinewithUrbisforecastsforthesame period.

Business investment Ledbyafallinmininginvestmentof25%and30%overthenexttwoyears.Non-mininginvestmentisexpectedtoincreasein2015-16,andfurtherstrengthenin2016-17.

Employment Employmentisexpectedtoimprovemoderatelyin2015-16,pickingupslightlyin2016-17.

Wages Wagegrowthisexpectedtoremainmodestforboth2015-16and2016-17,reflectingthemoderatepaceofeconomicgrowthandmildlabourmarket conditions.

3Macro-economic context

45%84%

55%16%

Mining Non-mining

PAGE 5 OF 6BUDGET 2015–16  Building confidence or castles in the air?

1+2+18+15+4+2+2+1+6+49 35+20+16+7+6+6+10

4The verdict

Where revenue comes from… Where taxpayers’ money is spent…

Fringebenefitstax$5.0 Billion

Superannuationtaxes$9.2 Billion

Otherpurposes$85.7 Billion

Companyandresourcerenttaxes$71.2 Billion

Health$69.4 Billion

Salestaxes$61.6 Billion

Education$31.9 Billion

Fuelsexcise$17.9 Billion

Defence$26.3 Billion

Otherexcise$7.0 Billion

Generalpublicservices$22.2 Billion

Customsduty$9.5 Billion

Allotherfunctions$45.0 Billion

Othertaxes$4.4 Billion

Non-taxrevenue$25.3 Billion

Individualsincometax$194.3 Billion

Socialsecurityandwelfare$154.0 Billion

Impact

TheBudget’sofficialaim,theTreasurerhastoldus,istoencourage‘allAustralianstogetoutthereandhaveago’.Coupledwithhistoricallylowinterestrates,therearerealincentivesforsmallbusinessestobringforwardinvestment.Howeveritisquestionablewhethermuchofthespendingwillgeneratesignificantlyhighergrowthandemployment,especiallyasmuchwilllikelyenduponimporteditems:computers,cars,ortradie’s tools.Moreimportantly,theBudgetneededtore-instilconfidenceinbusinessandconsumers.TherewillundoubtedlybeacollectivesighofreliefacrosstheelectoratethatthisBudgetwasindeedrelatively‘dull’inthattherewerenonastysurprises,andthereiscertainlyenoughtomakeatleastafewsmallbusinessessmile.However,overthecomingweeksincreasingattentionwilllikelybepaidtothelackofprogressinaddressinglongtermBudgetrepair.ThatDamocleanSwordstillhangsaboveus.

Anddoubtlessthesignificantdelayindeliveringthepromisedimprovementinchildcareassistance,togetherwiththeabandonmentofthePPLscheme,willleaveasourtasteinsomeparents’mouths.Critically,thereisnothinginthisBudgetthatislikelytochangetheoutlookfornewinvestmentbylargerbusinesses–thetypeofmajorinvestmentinitiativesthatwillreallyassistinliftinggrowthandemployment,butwhicharecurrentlyonholdinthefaceofsparecapacityandsluggishdemand.Noristheresignificantnewinfrastructureinvestmenttohelpbuildnationalproductivity.

ThetaskofBudgetrepairforthelongtermstillliesaheadofusanddifficultchoiceshavetobemade.Wherecanwemakecutstoexpenditurethatarefairanddonotleavethemostvulnerableinoursocietyexposed?Howcanwecontinuetoinvestineducationandinfrastructure,whicharecriticaltoAustralia’sfuturegrowth.Andhowdowebuildtherevenuebasebacktoasustainablelevelthatreflectstheendoftheminingboom?ThiswasaBudgetcarefullycraftedtoavoidcriticismandrestoreconfidence.Judgingbytheinitialreactions,ithasfallenshortonbothcounts.

PAGE 6 OF 6BUDGET 2015–16  Building confidence or castles in the air?

The Economic Advisory Team

For government

Economicresearch,analysisandmodellingplaysacrucialroleinpolicydevelopmentacrossallportfoliosandatalllevelsofGovernment.Urbis’EconomicAdvisoryteamsupportsgovernmentstodeliveroptimalpolicyoutcomesthatwillwithstandstakeholderscrutiny,byprovidingarigorousunderstandingofeconomic,socialandenvironmentaldriversandtheirassociatedcostsand benefits.

For organisations

Organisationsarechallengedonadailybasisasthedomesticandglobaleconomiclandscapechangesalongwiththepolicyenvironmentinwhichtheyoperate.Urbis’EconomicAdvisoryhasdeepandbroadexperienceinassistingpeakbodies,not-for-profitsandbusinessestobetterunderstandandnegotiatetheeconomic,financialandpolicyterrainandsodeliveroutstandingresultsto stakeholders.

Key areas of expertise:

§ Urbis’EconomicAdvisorygroupisabletoprovidecomprehensiveeconomicanalysistosupporttherobustevaluationofexistingpolicies,programsandprojects,aswellasthedevelopmentofnew ones.

§ Wehavehelpedgovernmentsatalllevelstounderstandtheeconomicconsequencesofawiderangeofinitiativesencompassingeducation,familysupport,employment,justice,technology,theenvironment,housingand infrastructure.

Contact:

NickiHutleyDIRECTOR02823399100410587586nhutley@urbis.com.au

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§ Economicimpactassessments § CostBenefitandReturnonInvestmentanalysis,

includingtriplebottomlineassessments,tomeetstandardsrequiredbyrelevantgovernmentguidelinesacrossstateandfederaljurisdictions.

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andforesighting. § Strategicinfrastructureneedsassessment

and analysis. § Surveydesign,deliveryandanalysis. § Stakeholderconsultationsandworkshops. § Developmentofthoughtleadership papers. § Macroeconomicoutlookpresentations(board,

strategicplanning,seminarsand conferences).

Urbis’ Economic Advisory team has highly developed skills in macro and micro economic modelling, forecasting and analysis, applied across a wide range of sectors, industries and policy portfolios.