No shock and awe, just a sedate affair

AUSTRALIANS hoping to gorge on offerings intended to stimulate the economy in Tuesday’s Federal Budget have been warned to prepare for lukewarm but at least digestible fare.

Though the electorate’s appetite has been whet by the sizzling entree of another Reserve Bank rate cut this week, economists expect the main course will be more of a sedate affair.

First, the good news.

The Government, having eaten a big helping of humble pie following last year’s warnings of a “budget emergency” and an end to the “age of entitlement”, will steer well away from the shock and awe rhetoric this time around, economists say.

This means it is all but assured of revealing a deeper deficit than the $40.4 billion hole forecast at the mid-year update in December, but will pump up the opportunities for families and small businesses.

That’s crucial to Treasurer Joe Hockey’s long-term vision of a return to surplus, although how long is now anyone’s guess, economists say.

With Canberra’s hitherto reliable sources of revenue such as royalties from iron ore looking less promising and the tax system generally deemed inefficient, spurring growth across the business sector and household spending appears the next best option.

“There will be tax breaks for small businesses,” says JP Morgan chief economist Stephen Walters, noting widespread speculation of a 1.5 per cent tax break for incorporated businesses with annual revenue up to $2 million.

“The centrepiece is said to be a (potential $3 billion) families’ package that will likely include changes to childcare rebate arrangements.

“There could be increased subsidies for in-house childcare as well as more generous family payments.”

The theme is clear: to get the finances in order, more people need to be either in the workforce or in a better position to spend money. And the bad news? That’s pretty much where the sugar runs out.

According to Goldman Sachs chief economist Tim Toohey, the Government’s promise to be fiscally prudent — basically putting debt-busting measures ahead of all other options — will take many of the usual stimulatory plans off the table.

“They’re hamstrung on their ability to do a lot more at the moment and that’s why I think the budget will be used as a stepping stone to change the discussion around what can feasibly be accepted by voters in terms of debt and deficit going forward,” Mr Toohey says.

Already, thousands of wealthier retirees will see their part-pensions disappear from 2017, resulting in a $2.4 billion savings boost that should result in minimal political pain, economists say.

HSBC Australia chief economist Paul Bloxham says broadening the tax base, lifting the GST rate and reducing opportunities for tax avoidance could deliver more revenue to Canberra without failing the “fairness” test.

Mr Bloxham says Australia’s tax mix is overreliant on income taxes.

By comparison, New Zealand, which has less than a fifth of the population of Australia, raises revenue equal to 42 per cent of gross domestic product compared with Australia’s 34 per cent.

And that’s with a much lower top-tier personal income tax rate — 33 per cent compared with effectively 49 per cent in Australia — no stamp duty and GST of 15 per cent, compared with Australia’s 10 per cent.

Perhaps the last word should go to National Australia Bank chief Andrew Thorburn, who has been proactive in trying to shake the lender free of its weaker assets and give it a chance to compete.

Simply, his message to businesses is that the economy’s fortunes rest in their hands, not Mr Hockey and Co.

“I think we could probably be more confident than we are,” Mr Thorburn said, speaking as the bank posted its first-half results on Thursday.

“So I’m hoping that over the next couple of years, given that interest rates have reached an all-time low, that we will see businesses back themselves.

“We can’t ask the government to fix this, I mean they must deal with the public debt and the path to surplus.”