Budgeting for the long term

Sunday, 01 June 2014

John H C Colvin photo
John H C Colvin

    John H C Colvin reviews the recent federal Budget from a director’s perspective.

    With the Football World Cup in Brazil less than a fortnight away and following the Coalition government’s first Budget last month, I can’t help but think Australia keeps scoring own goals.

    It is obvious that the nation’s balance sheet needs to be repaired and the government should be congratulated for taking on this important task even if it is politically unpopular in the short-term.

    However, the timeframe in which this should be done – and the measures used to achieve it – are open to debate.

    My starting point in this debate is the fact that the private sector pays 87 per cent of all taxes in this country and, as a result, it should be unshackled from burdensome, knee-jerk measures that curtail its ability to thrive and ultimately create investment and jobs for more Australians.

    Throughout the most recent federal election, the Coalition quite clearly communicated to the electorate the need for a credible medium-term fiscal strategy to put our budgetary house in order and bring the budget back under control. This is a sound principle and one I believe went a long way to helping it achieve electoral success.

    The delivery of its first Budget was an opportunity for the government to lay the foundations for this medium to long-term fiscal strategy.

    While there were some sensible policies, the tax levy on income earners over $180,000, is a short-term measure. While politically attractive, it appears to be going the wrong way.

    Certainly, piecemeal tax changes such as this will not help the economy, as it will hit consumption and investment, as well as undermining incentives to work, invest, innovate and take entrepreneurial risks.

    It may also have a strong negative effect on consumer spending and investment.

    The director community has long been calling for a structural review of Australia’s tax system in preference to continued short-term changes.

    The deficit levy proposed in the Budget would not be in line with these calls and would mean that Australia’s top tax rate, at an effective 49 per cent, would be among the highest in the world and would cut in at one of the lowest income levels among the OECD countries.

    This is a competitive disadvantage for Australia in attracting investment, given the lower personal tax rates in other countries, including our Asian neighbours and New Zealand.

    What we also fear is the old adage that there is “nothing more permanent than a temporary tax”.

    The government has currently slated the tax to end after four years. But what if the government changes before this?

    Last month, we released the latest results of our Director Sentiment Index, and while the survey was conducted prior to the Budget, there were some clear messages for government.

    The survey showed that 60 per cent of the directors polled thought that personal income taxes were already too high and only 16 per cent thought the Budget should be moved into surplus in the next
    three years.

    In addition, 43 per cent of directors think the government should move towards a budget surplus in the next three to five years and almost a quarter do not see a Budget surplus as a priority at all.

    What directors are looking for is a credible long-term plan to achieve “quality cuts” to outlays and get the Budget back on a sustainable footing.

    The survey also showed that there is little support in the director community for the government’s paid parental leave scheme.

    Only eight per cent expressed support for the original plan to provide benefits to women who earn up to $150,000 and almost 60 per cent believed the government should either defer or abandon the scheme.

    It is important to put some of this sentiment into context: the Coalition government still rates significantly higher in the eyes of directors than the former Labor government.

    It is just that the honeymoon for the Abbott government has probably ended, as it tends to do for all newly-elected parties.

    It will be interesting to track director sentiment in the next survey and assess the Budget’s impact.

    The question needs to be asked; what is the role of government?
    By and large I believe governments are elected on the basis of the long-term vision they have communicated for the nation’s future.

    As directors must take into account the long term sustainability and viability of their companies, sometimes in conflict to short-term shareholder gains, so too should governments ensure the Australian community is set up for the challenges and opportunities that await us in the near and distant future.

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