If it had been down to Treasurer Josh Frydenberg, he would have probably chosen a different time to give his second Budget than 7th October.
Any optimistic long-term plans he may have had for the economy when he came into office in 2018 have been blown totally off course by the Covid-inspired recession.
It’s not just here in Australia where the pandemic has had a cataclysmic economic effect. As Frydenberg confirmed in his speech, the equivalent of 600 million people around the world have lost their jobs and the global economy is set to contract by 4.5% this year giving us ‘the most severe economic crisis since the Great Depression.’
This has led to substantial uncertainty everywhere, with any future long-term confidence very much dependent on finding an effective vaccine.
Frydenberg acknowledged that the Australian economy has been hit hard, despite suffering a lower fall in GDP than any other advanced nation in Q1, 2020. The current deficit of $213 billion equates to 11% of GDP, and debt is set to reach an eye-watering $966 billion by 2024.
The final estimate is that the economy will contract by 3.75% this year, with the forecast growth of 4.25% in 2021. Even this growth forecast is predicated on an effective vaccine being produced, and the whole population being inoculated before the end of 2021.
The attention-grabbing headline figure from the Budget was the $98 billion state intervention to boost the economy – and that’s on top of the hundreds of billions already committed in a series of measures this year.
With interest rates at historic long-term lows, there’s a general consensus that this level of borrowing is perfectly acceptable in these unprecedented times. As Deloitte Economics Director, Chris Richardson commented: “There are plenty of things to worry about in a pandemic – extra government debt isn’t one of them.”
Here’s a summary of the key points Frydenberg announced.
Personal taxation – backdated tax cuts
In a bid to boost consumer spending and help stimulate economic activity, the government has brought forward its planned 2022 tax cuts to this year, backdating them to 1st July.
The top of the 19% tax rate band has been increased from $37,000 to $45,000, and the 32.5% band threshold has also been raised, from $90,000 to $120,000.
These measures give a substantial boost to wage earners, meaning someone earning $50,000 will be paying $1,080 a year less in tax. Someone earning $100,000 will save $1,733.
Approximately 11 million taxpayers will benefit from these measures.
Low- and middle-income earners also receive additional support with the retention of the Low- and Middle-Income Tax Offset (LMITO) of $1,080 for a further year, providing further targeted tax relief.
Help for pensioners – tax-free payments
In a further measure designed to boost consumer spending, the government also confirmed that they will pay two more tax-free payments of $250 to pensioners, and others on government support, on top of similar payments made earlier this year.
The first payment will be in November – with the hope that this will boost retail spending in the run-up to Christmas. This will be followed by a second instalment in March 2021.
Support for businesses – a range of measures
As well as support for individuals, the Treasurer announced a whole series of measures designed to help businesses weather the current economic storm, and to continue to grow and invest as things start to settle down.
He has expanded access to a range of small business tax concessions by reducing the small business entity turnover threshold to $10 million. This means businesses with an aggregated annual turnover between $10 million and $50 million will, for the first time, have access to up to ten small business tax concessions.
The government will also support all businesses with aggregated annual turnover of less than $5 billion – 99% of all businesses – by enabling them to deduct the full cost of eligible capital assets purchased between now and the end of June 2022.
In a further measure worth more than $5 billion, they will allow eligible companies to carry back tax losses from the 2019-20-, 2020-21- or 2021-22-income years to offset previously taxed profits in 2018-19 or later income years.
Boosting Job Growth – a hiring credit
To further encourage business growth, and to reduce the numbers of those currently out of work, eligible employers will be able to claim a ‘hiring credit.’ This will be $200 a week for each additional eligible employee they hire who is below 30 years of age, and $100 a week for anyone aged 30 to 35, subject to eligibility requirements.
All businesses aside from those in the banking sector are eligible. The plan is estimated to help create nearly one million new jobs in the next four years.
In addition to this, they have introduced a new ‘Boosting Apprentices Wage Subsidy’ for new apprentices or trainees who commence work before 30th September 2021.
Infrastructure – a big commitment to building projects
The government anticipate the building sector playing a key role in the post-Covid economic recovery.
They have committed a total of $15 billion to new infrastructure projects and local building development. This includes:
- $10 billion allocated to the long-term infrastructure plan to build and upgrade bridges, roads and rail
- $3 billion for local councils to upgrade local roads, footpaths, and street lighting
- $2 billion on new water infrastructure projects.
Superannuation reforms – ‘Your future, your super’
Despite the focus almost entirely devoted to the state of the economy, there was time for an important announcement regarding superannuation.
There has been increasing concern at the number of people in underperforming super funds, and the number of duplicate accounts held by individuals which may have been forgotten about as a result of moving from job to job during their working life.
The government has therefore allocated $159.6 million over the next four years to implement changes to address these issues. The packages of measures include:
- A new online comparison tool called ‘YourSuper’ to help individuals compare the charges and investment performance of various super schemes
- An annual review of all super funds to check for underperformance, with the first review within the next 12 months. Two consecutive underperformances will result in the scheme closing to new members
- A tightening of the rules around super trustees, with new measures around accountability and transparency.
Driving economic growth
The Covid-19 pandemic has created continued uncertainty and has impacted greatly on the economic health of the nation. The government hope that this package of measures will help drive economic growth by boosting consumption, rather than people simply saving the extra disposable income they’ll receive via these tax cuts.
The big package of investment into infrastructure and building makes it clear which sector the government are hoping will lead the recovery.
The Budget statement has received mixed reviews from commentators and economists, and it remains to be seen whether it will prove sufficient to drive the growth the economy needs, or whether further measures will be required.
Frydenberg himself acknowledged that ‘there remains a monumental task ahead.’
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