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au courant
Special Budget Edition 2014
The federal budget is a big deal for us accountants. This is the night when the federal government of the day, hands down its policy agenda for the coming twelve months, and all the accompanying changes in spending, taxation policy and regulation are announced.
In order to advise our clients properly, we need to have a clear understanding of what will change, and more importantly, how these changes will affect people in their day to day lives. So after quite a late night last night, we have put together this special budget edition of our regular quarterly newsletter.
We hope this summary leaves you a little clearer on how this year’s budget will affect you, for better or for worse.
Andrew.
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Background
There has been a higher than normal build up to this budget, partly because it is the first for the new Abbott government, and partly due to the recent release of the National Commission of Audit (NCoA).
The NCoA was instigated by the Abbott government shortly after it came to office last year. Headed by former Business Council of Australia president Tony Shepherd, the NCoA’s objective was to identify areas of wasteful spending by the federal government and provide cost cutting recommendations.
The NCoA took 250 public submissions and made a total of 86 recommendations. The Government was under no obligation to implement these recommendations.
Some of the NCoA’s recommendations have been controversial which has significantly added to the amount of political noise during the lead up to this budget. Very strong views (and a lot of rhetoric and ideology) have been expressed recently, from both sides of politics.
Now that the budget has actually been handed down, we can thankfully put politics and ideology aside for a moment, and focus on the facts.
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The Overall Budget Direction
As promised, the government has focused its attention on reducing spending within this budget, particularly within the areas of health, welfare and education. As is common place for most new conservative governments, the overall size of the government will also be trimmed, with 230 government programs, 70 government agencies and 16,500 public service jobs to be axed (interestingly, the Australian Taxation Office will be the department hardest hit with approximately 3,000 job losses planned).
The various spending adjustments announced represent a series of tweaks and adjustments over the next several years rather than sweeping wholesale reforms, perhaps with the exception of the education sector (see below). Rather predictably, the severity of these changes is not quite as harsh as initial media reports may have led us to believe, though this is certainly the toughest budget handed down since the Howard government’s first budget in 1996.
Very few taxation changes were announced within this budget. The only significant adjustment applies to high income earners with the much publicised 2% ‘debt levy’ applying to incomes over $180,000 per annum.
The National Disability Insurance Scheme has remained intact, and will be rolled out as originally planned. The controversial Paid Parental Leave Scheme will go ahead though maximum payouts for the 26 week leave period will be capped at $50,000 rather than the original $75,000.
Infrastructure spending will receive a significant boost from this budget with an $11.6 billion Infrastructure Growth Package announced, the lion’s share of which will be spent in Western Sydney. There is no mention of any of this spending being earmarked for the Illawarra region.
Previously announced federal health and education funding won’t be altered though future funding arrangements will be changed to make them much less generous. This will save the federal government billions of dollars from 2017-18 onward and place much more responsibility on state governments, and pressure on state budgets. Given that states receive a large amount of their funding from GST revenue, these measures should also heighten debate around possible changes to the GST.
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The Big Important Numbers
The budget is based on the following key projections:
Budget Deficit 2014-15 - $29.8 billion
Budget Deficit 2015-16 - $17.1 billion
Budget Deficit 2016-17 - $10.6 billion
Economic growth 2014-15 - 2.5%
Unemployment 2014-15 - 6.25%
Inflation - 2.25%
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Incoming and Outgoing - A High Level View of the Numbers
Like any budget, the federal budget is made up of incoming revenue and outgoing expenditure. Here is a look at where all the government’s money will come from, and where it will go, during the next twelve months.
Where does the money come from, and where is it going? Have a look here...
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Changes Impacting Small Business Owners
There are very few changes in this budget for small business owners… good or bad.
The previously announced cut to the company tax rate from 30% down to 28.5% will still apply from 1 July 2015. Larger companies with taxable income exceeding $5million will be liable for a 1.5% levy to fund the Paid Parental Scheme, effectively nullifying the tax rate decrease.
Fuel excise, which has been locked at 38.1c/litre since 2001, will now be pegged to inflation. Based on the current inflation rate, this should add approximately 1c/litre to the price of petrol each year, and will obviously impact transport and fuel intensive businesses.
Subsidies of up to $10,000 will be available to employers who hire and retain mature workers (over 50).
Given the effective increase in the top marginal tax rate via the 2% debt levy, the Fringe Benefits Tax rate will also increase from 47% to 49%.
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Changes Impacting Families
There are quite a few changes for families in this budget, the two primary areas are around the Family Tax Benefit (Part A & B), and health.
Family Tax Benefit
- Family Tax Benefit Part B will no longer be available when the youngest child turns six (currently sixteen)
- The Family Tax Benefit Part B primary earner income limit threshold will reduce from $150,000 per annum to $100,000 per annum, from 1 July 2015.
- The rates of payment of Family Tax Benefit Part A & B will be frozen for two years and not be indexed.
- End of year supplements will no longer be indexed and will be paid at their original values of $600 per child for Part A and $300 per child for Part B.
Health
Visits to the doctor will now incur a $7 fee. Visiting a pathologist or diagnostic imaging service will incur a $5 fee. Funds collected will be allocated to a new Medical Research Future Fund.
Indexation of some Medicare Benefits Scheme (MBS) fees will be paused for 2 years. Indexation of the income test for the Medicare Levy Surcharge and Private Health Insurance rebate will be paused for three years.
The co-payment rate for medicines on the Pharmaceutical Benefits Scheme (PBS) will increase by $5 (from $37.70 to $42.70).
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Changes Impacting Students
Some significant changes were announced within the tertiary education sector including:
- University course fees will be de-regulated, effectively allowing universities to charge what they want.
- The HELP student loan scheme will remain (regardless of how expensive a course may become), though graduates will begin repaying debts once they earn $50,638 (down from the current level of $53,345).
- HELP debts will be pegged to the government bond rate rather than inflation, resulting in higher interest being applied to the loan.
- The range of courses to which the HELP scheme applies will be expanded to include TAFE, private universities and diploma programs.
- Universities will have to contribute $1 in every $5 they earn from fees toward a new Commonwealth Scholarship Scheme designed to provide support to students from disadvantaged backgrounds.
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Other Changes
Looking through the detail of the budget papers, there are many small changes (too many to list in this update) which in isolation, do not have a large impact. Overall, net spending reductions over four years from policies announced last night, total $36 billion.
Some of the other notable changes not already listed however, include:
- A significant reduction to foreign aid spending of $7.6 billion over five years.
- An increase in the retirement age from 65 to 67 by 2023 and to 70 by 2035 (these changes will apply to all of us born after 1965).
- Pension means test thresholds will be frozen for three years, and then reduced resulting in fewer people with assets (other than their family home) being eligible for pensions.
- Unemployment benefits for people under 30 will become much harder to access with a six month waiting period to access to Newstart or Youth Allowance. Income support will only be provided for six months and recipients will need to participate in Work for the Dole.
- In what many see as a token gesture, federal politician’s salaries will be frozen for one year… big deal.
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Conclusion
This is obviously a much tougher budget than Australians have experienced for many years, and will no doubt receive much criticism from those groups most effected. The sales pitch used by the government to sell this harsh budget has been the need to fix the ‘budget crisis’. This language is overly dramatic, and the federal budget is far from crisis point. The case for a tougher than normal budget, however, is strong.
The resources boom of the last decade resulted in record government revenue, which was generally spent via tax cuts and/or generous government initiatives - from both sides of politics. As the mining boom has slowed, tax revenue has fallen, though the cost of many of these policies remains. Coupled with an aging population and naturally increasing health and welfare costs, projected deficits were beginning to stretch a long way into the horizon.
The budget cuts announced will affect different people in different ways. At a macro level however, the spending reductions announced are not dramatic. Policy decisions announced last night will reduce government spending by $36 billion over the next four years. This sounds like a big number, until you place it next to the $1.7 trillion the government will spend over the same period.
One needs to reflect on the global financial crisis of 2008/2009, and the stimulus spending which was undertaken by the then Rudd Government. It is in times such as those, that government spending is needed. Though it must be remembered, that at some point, we must start to pay that back. It would appear, that time has come.
I think the ongoing debate which will ensue over the coming months, will focus more so on who is being targeted to pay this back. Interesting times ahead for the Senate.
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