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2010-11 Federal Budget Analysis

Comment
Despite being the key economic driver of the Nation, the 2010-11 Federal Budget fails to recognise the important role Western Australia, and the local business community, is playing in the nations economic recovery. CCI, is concerned that the Government is relying on its proposed Resources Super Profits Tax (RSPT) to raise billions of dollars to help get the budget back into the black sooner. CCIs analysis reveals that without the new resources tax, the budget would remain in deficit through the forward estimates. There are a number of positive aspects in this years budget, including a greater recognition of the need to invest in the education and training of our future workforce, in order to 2010-11 Federal Budget Overview address looming skill shortages. However, this initiative is not matched by increases in the Deficit of $39.6 billion in 2010-11, and a return migration program which is a key strategy to to surplus by 2012-13 ($16 billion). address capacity constraints. Net debt to peak at $93.7 billion in 2012-13. CCI is concerned that WA is the forgotten state, which is highlighted by the fact that Western Australia will receive support for just one infrastructure project a rail line in the States Goldfields region. However, important projects such as improving road infrastructure in and around Perth Airport, the Pilbara Cities project which will provide much needed improvements to social infrastructure in Karratha and Port Hedland, the proposed supply base for a new port in Derby, and electricity upgrades in the mid west have all been overlooked. Considering Western Australia accounts for over 40 per cent of Australia's total exports, is home to more than 10 per cent of Australia's residents, and accounts for around 14 per cent of Australia's economy, this year's Federal Budget has not adequately taken into account the needs of a growing, and nationally significant state. Introduction of a 40 per cent RSPT from 1 July 2012, which will raise $12 billion by 2013-14 Reductions to the company tax rate to 28 per cent by 2014-15 for all business, and 2012-13 for small businesses. Small businesses with an instant depreciation for assets with an acquisition cost under $5,000, as well as a simplified pooling arrangement Economy is expected to expand by 3 per cent in 2010-11, and accelerate to four per cent by 2011-12. Key funding initiatives focused on; health (additional $2.2 billion), new infrastructure fund ($5.6 billion), Skills for Sustainable growth ($661 million) and renewable energy fund ($652 million)

Fiscal Outlook
The Governments fiscal position is expected to improve going forward, on the back of stronger revenue growth as economic conditions improve, and the associated recovery in tax revenues (Table 1).
Table1 Key Budget Aggregates
Commonwealth Government 2008-09 Actual Revenue ($b) % GDP Expenses ($b) % GDP Fiscal Balance ($b) % GDP Underlying Cash Balance ($b) % GDP
Source: Commonwealth Budget 2010-11

2009-10 Estimated Actual 294.2 22.7 343.1 26.5 54.8 4.2 57.1 4.4

2010-11 Budget Estimate 321.8 22.9 354.6 25.2 - 39.6 2.8 2.9 - 40.8

2011-12 Forward Estimate 356.4 24.0 364.6 24.5 - 12.1 0.8 0.9 - 13.0

2012-13 Forward Estimate 381.9 24.3 381.0 24.3 2.0 0.1 1.0 0.1

2013-14 Forward Estimate 407.2 24.6 398.0 24.0 6.3 0.4 5.4 0.3

298.9 23.7 324.6 25.8 29.7 2.4 27.1 2.2

An underlying cash deficit of $57.1 billion is expected in 2009-10, up from a deficit of $27.1 billion in 2008-09. In 2010-11, the Government is expecting to deliver a deficit of $40.8 billion which is equal to 2.9 per cent of GDP (Chart 1).
Chart 1 Commonwealth General Government
Budget Balance
Projected

$10.0B $0.0B -$10.0B -$20.0B -$30.0B -$40.0B -$50.0B -$60.0B 2008-09


Source: 2010-2011 Federal Budget

2.5% 1.5% 0.5% -0.5% -1.5% Budget Balance As a Per Cent of GDP -2.5% -3.5% -4.5% -5.5% 2010-11 2012-13

Looking forward, the Commonwealths budget is expected to return to surplus three years sooner than expected. Following an underlying cashing deficit of $13 billion in 2011-12, a modest surplus of $1 billion is predicted for 2012-13. This is expected to rise to $5.4 billion in 2013-14. Public sector net debt has also improved from earlier estimates. Nonetheless, the net debt position is estimated to rise from $41.8 billion (or 3.2 per cent of GDP) in 2009-10, to a peak of $93.7 billion (or six per cent of GDP) in 2012-13. Net debt is then expected to fall back slightly to $90.8 billion in 2013-14, equivalent to 5.5 per cent of GDP. The governments fiscal and deficit exit strategies remain unchanged. New spending initiatives in the budget have been funded either through tax increases or (limited) savings, with the emphasis largely on the former.

The medium-term fiscal policy remains to: achieve budget surpluses, on average, over the medium term; keep taxation as a share of GDP below the level of 25.0 per cent for 2007-08, on average; and improve the governments net financial worth over the medium term.

Once the economy returns to above trend growth, the government has committed to: allow the level of tax receipts to recovery naturally as the economy improves; and hold real spending growth to two per cent a year until the budget returns to surplus.

Revenue
Total revenue has been revised upwards in 2010-11 and across the forward estimates since the Mid-Year Economic and Fiscal Outlook (MYEFO). The higher revenue reflects the significant improvement in prospects as the economic recovery in Australia gathers pace, as well as the introduction of new taxation measures. Since MYEFO, Government operating revenue for 2010-11 has been revised up by $17.9 billion, to $321.8 billion (or 22.9 per cent of GDP). Across the forward estimates, revenue is expected to progressively increase, to $407.2 billion (or 24.6 per cent of GDP) by 2013-14. The increase in revenue will largely be underpinned by tax receipts, which are expected to increase strongly across the forward estimates as the economy recovers. Tax receipts are expected to rise from almost $270 billion in 2009-10, to $386 billion by 2013-14.

Key Revenue Measures


a 40 per cent Resource Super Profits Tax (RSPT) on non-renewable resources will be introduced from 1 July 2012, and will raise $12 billion over the forward estimates; the company tax rate will be reduced from 30 per cent to 29 per cent for 2013-14 and 28 per cent from 2014-15, at a cost of $2.3 billion over the forward estimates; for small business, the company tax rate will be reduced to 28 per cent from 2012-13; from 1 July 2010 the low income tax offset will be lifted to $1500, effectively lifting the tax free threshold of $16,000 for taxpayers with incomes up to $30,000. As a result, taxpayers with an income of $60,000 will be $450 better off; the superannuation contribution cap for individuals over 50 years old with superannuation balances below $500,000 will be increased, at a cost to revenue of $1.3 billion over the forward estimates; small businesses will be provided with an instant asset write-off for assets with an acquisition cost under $5,000 and a simplified pooling arrangement, at a cost to revenue of $1 billion over the forward estimates; a 50 per cent discount will be provided for interest income, at a cost to revenue of $1 billion over the forward estimates; tobacco excise will be increased by 25 per cent, with effect on and from 30 April 2010, which will raise $5.5 billion over the forward estimates, including $505 million in underlying cash GST collections that will be paid to the States and Territories;

funding to the Australian Taxation Office for GST compliance will be increased, which is expected to increase revenue by $3 billion over the forward estimates, including a $1.56 billion in underlying cash GST collections that will be paid to the States and Territories; and the Carbon Pollution Reduction Scheme will be deferred, with its removal from the estimates expected to reduce revenue by $15.3 billion over the forward estimates.

Expenses
Growth in general government sector expenses is expected to ease in the short term, as policy measures aimed at supporting economic growth are withdrawn, and the caps on spending growth are introduced. Real expenses growth are expected to peak in the current financial year, and decline progressively over the forward estimates, in line with the Governments intention to keep real growth in expenditure to two per cent per year until the budget returns to surplus. In real terms, expenses growth is expected to average 1.6 per cent over the forward estimates. This cap on expenses growth is expected to remain in place until the surplus represents one per cent of GDP. The largest share of government expenditure is directed towards social security and welfare, which accounts around one third of the Budget outlay. This is followed by general government services and health, which account for 19 per cent and 16 per cent of expenditure respectively.

Key Expense Measures


The National Health and Hospitals Network will be implemented at a cost of $7.3 billion over the forward estimates (including 2009-10). Military contribution in Afghanistan, the Middle East, East Timor and the Solomon Islands will be enhanced at cost of $1.1 billion in 2010-11. Drought assistance for primary producers and small businesses will be extended, valued at $420 million in 2009-10 and 2010-11. The Carbon Pollution Reduction Scheme will be deferred, which will reduce expenses by $18.2 billion over the forward estimates. Reforms to the Pharmaceutical Benefits Scheme, which will deliver savings of $1.3 billion over four years.

Infrastructure Investment
There is little in the way of infrastructure funding for Western Australia in the 2010-11 Federal Budget. Despite the State having a long list of infrastructure priorities, only one project has received funding in the Budget. $95 million has been committed to upgrade the rail line between Kalgoorlie and Koolyanobbing in the State's Goldfields. A new infrastructure fund will also be created which will be derived from the Resources Super Profits Tax, and will start with $700 million from 2012-13 and grow over time. The Government has indicated that resource-rich states will receive relatively more funding, reflecting the greater call on their budgets for investment in infrastructure.

Broader Policy Measures


Skills for Sustainable Growth - $661.2 million will be invested to boost the skills of Australian workers and ensure the education and training systems are responsive to the needs of the economy. This will include $200.2 million for a Critical Skills Investment Fund which will provide support for 50 per cent of the cost of training for large firms and up to 90 per cent of the cost of training for small firms. Applications for funding will be through a competitive tender process. Renewable Energy Future Fund an investment of $652.5 million over four years will be provided into this fund to provide support for the development and deployment of renewable energy projects. Carbon Pollution Reduction Scheme the Government has heeded calls of business groups such as CCI in announcing that it would not move to legislate the CPRS before the end of 2012 and, importantly, will only do so after this time if there is sufficient international action. Migration Program - The overall size of the migration program will remain unchanged with a total of 168 700 places, comprising a total skill stream of 113,850 places, a total family stream of 54,550 places and 300 special eligibility places. The overall level of skilled migration will increase by 5,750 program places. This includes an additional 9,150 program places for employer-sponsored skilled migration and a decrease of 3,600 places for general skilled migration. An additional 200 visas in the business skills visa category will also be offered.

Economic Outlook
The Commonwealth Government has forecast the economy to grow by 3 per cent in 2010-11, before rising to four per cent in 2011-12. The main contributors to growth are increases in business investment and household consumption. This growth outlook is significant insofar that it also influences the fiscal outlook. If growth is weaker than forecast, this will in turn also affect the recovery of the nations fiscal position. It is also not clear what impact the proposed RSPT will have on this outlook, to the extent that it impacts on investment decisions of mining companies.
Table 2 Australian Economic Aggregates
Year Average Growth (%) 2008-09 Expenditure Household Consumption Dwelling Investment Business Investment Domestic Final Demand Exports Imports Net Exports (cont.) Gross Domestic Product Labour Market Employment Unemployment Rate
Source: 2010-11 Federal Budget.

2009-10 Budget 2 3.0 -2.0 3.0 1 5.0 - 2.0 2 5

2010-11 Budget 3 7 7.0 3 5.0 9.0 -1.0 3 2 5.0

2011-12 Budget 4.0 4.0 12 4 6.0 8 - 4.0 2.0 4

Actual 1.9 -1.9 6.6 2.7 0.1 -2.8 0.6 1.3 0.1 5.7

Domestic final demand is expected to expand by 3 per cent in 2010-11, on the back of a strong rise in business investment (of nine per cent) and to a lesser extent household consumption (of 0.5 per cent). Total national exports are expected to rise by five per cent in 2010-11 (after increasing moderately by 1.5 per cent in 2009-10), however this will likely be more than offset by a nine per cent increase in imports (after a increase of 5 per cent in 2009-10), so that net exports will actually contract one percentage point to GDP growth in 2010-11. The terms of trade are expected to surge to 60 year highs from a small decline in 2009-10. The terms of trade are forecast to increase by 3 per cent in 2010-11, due to significant increases in commodity prices. Nominal GDP is forecast to increase by 8 per cent in 2010-11, reflecting the expansion in real GDP of 3 per cent and the substantial improvement in the terms of trade. The labour market is anticipated to improve significantly over the outlook period, highlighted by the expected decline in the unemployment rate to 4 per cent by 2011-12. Employment is expected to increase by 2 per cent in 2010-11 and by two per cent in 2011-12 for the nation. The participation rate is also forecast to increase going forward, reaching 65 per cent in 201112. Wages growth around Australia is expected to pick up to 3 per cent in 2010-11 and four per cent in 2011-12, reflecting the tightening in labour market conditions. Inflation is forecast to stabilise as economic conditions improve. Inflation is forecast to moderate to 3 per cent through the year to the June quarter 2010 and 2 per cent through the year to June quarter 2011 and 2012, which is inside the Reserve Bank of Australias two to three per cent target band for inflation. This forecast would appear to be optimistic, considering the strength of the economic recovery and the return to full employment over the next few years. This will have implications for interest rates.