Federal Budget 2023: expert analysis

Garreth Hanley:
This is With Interest, a business, finance and accounting news podcast, brought to you by CPA Australia.

Dr Jane Rennie:
Hello and welcome to this special edition of With Interest. I'm Dr. Jane Rennie, general Manager media and content at CPA Australia. It's Wednesday the 10th of May, the day after Treasurer Jim Chalmers delivered the budget in Canberra. Today we're going to discuss the ins and outs of the budget, including where the money is coming from and where it'll be spent. Joining me to provide an expert perspective are CPA Australia's Senior Manager Taxation Policy, Elinor Kasapidis, and Senior Manager Business Policy, Gavan Ord. Welcome, Elinor and Gavan.

Elinor Kasapidis:
Good morning.

Gavan Ord:
Good morning, Jane, and good morning to our listeners.

Dr Jane Rennie:
Gavan, last night you attended the budget lockup and indeed you are still in Canberra. What was your overall assessment of the budget once you got your hands on the papers?

Gavan Ord:
Look, that's a good question and it's sort of a, you would say, balanced. It's sort of the budget for a time of high inflation. So overall, suiting the times, but lacking a vision. So we said this in October last year when they did their last budget. They're addressing the current issues that they face, but there's nothing really in this budget setting out a vision, particularly on economic reform and in particular tax reform. So we have to have that discussion, but we're just not having it at this point in time. And hopefully, at some point in the very near future there will be a serious discussion on broad-scale economic reform. But in terms of the budget, it was balanced. There was support for low-income earners which need it, and I don't think there's too much in there which would indicate that their actions would add to inflationary pressures.

Dr Jane Rennie:
And what about you, Elinor? You worked through the night preparing budget analysis. In the cold, hard light of day, how does this budget stack up overall?

Elinor Kasapidis:
Like Gavan said, it's reflective of the times we find ourselves in. And I think it does recognise the inflationary and budgetary challenges that Australia faces. I think that while structural deficits look to be easing, you see some of the paying down of debt. The NDIS elephant in the room as well as, as Gavan mentioned, the complete lack of discussion on tax reform will continue to plague this and future governments. One thing I'd note is that this government was brought in with a vision. Voters really wanted to see some of their foundation policies go forward. But it does look like once you're in government, the real world hits and often you are constrained. And I think that Chalmers has done a good job in recognising the environment, the impact on businesses, the struggles of households and individuals. And therefore, this budget hasn't necessarily gone there, but that pressure still remains.

Dr Jane Rennie:
Elinor, as Gavan mentioned, this budget was supposed to be the second act to October's warmup act. It was indeed a bit quieter than I was expecting. Do you think that is a fair assessment?

Elinor Kasapidis:
Yes, but I'm getting used to it. We've had quite a few budgets over the past few years. And bar the COVID announcements, the days of big bang budget announcements and reformist ideas hitting the public first on budget night are over. And this isn't a bad thing, as most real reforms need consultation, lots of stakeholder input, and carefully considered policy design. So my view is that we need to move away from this expectation that the budget will deliver surprises, even good ones, and rather participate throughout the year into co-designing and collaborating on big ideas that, on budget night, can be costed and announced.

Dr Jane Rennie:
Before we get to where the money will be spent. I think it's helpful to know how much the government had to play with. The budget revealed a modest surplus of 4.2 billion, that's a $41 billion improvement on October's budget forecast. There has already been some debate about who's responsible for this with both major parties claiming responsibility. Leaving that aside for a moment, it's certainly a major departure from where Australia was predicted to be. Gavan, what has driven this additional revenue?

Gavan Ord:
And I think you're right, we're going to leave aside this political debate around where this came from, where this extra money came from. But if you look at the budget papers, they mentioned commodity prices coming in much higher than forecast. And I don't think either party can actually claim that they had a direct influence on the global commodity price market. So maybe neither side can claim success on this. Also, some of the expenditure was lower than expected. As well, particularly because employment has remained higher than expected. And there's also been a general increase in company tax receipts, not just in the commodity sector. And because of higher than expected levels of employment, personal income tax receipts are higher. So it's a combination of commodity prices, better than expected tax receipts, and some lower expenditure, particularly on welfare, and a little bit lower than expected interest rate payments from the government.

Dr Jane Rennie:
In any event, Gavan, the surplus is forecast to disappear pretty quickly, isn't it? Will it be years before we see another one?

Gavan Ord:
Well, based on the forecast, yes. There's red ink deficits as far as the eye can see. But who knows? It could be another blip like this year where commodity prices shoot up. But putting that aside, yes, we'll see deficits for some time, and Elinor spoke about structural deficits. We are in a period of structural deficits, but they are much lower than what was expected in October or even March last year. So it's not looking as grim as it has been up in that last 18 months or so.

Dr Jane Rennie:
Can you run us through some of the other high level budget figures, Gavan?

Gavan Ord:
So we've got GDP is looking at around 1.5%. Inflation around 6% this year, and then starting to track down towards 3% to 4%, and then 2% to 3% in a couple of years time. Wages growth will remain below inflation till about 2023, '24. So that's when the general community will start to see a real increase in their wages. Unemployment will start to moderately move up about 3.5% now to 4.25%, and 4.5% by 2024, '25. So we are in a period of, and we all know this, the economy's slowing. And the economy's going to remain weak for probably one to two years, and then start to pick up after that. That's the forecast in the budget. Inflation will come down as the economy slows. So we are going through a period of slower economic growth.

Dr Jane Rennie:
Gavan, just returning to the surplus for a moment. In a way I feel it opened a can of worms for the government because it created more options in terms of fiscal policy. How would you describe the fiscal policy approach in the budget?

Gavan Ord:
I would describe it as balanced. It's neither austere nor expansionary. So they've tried to seek... Well, the treasurer's tried to seek a balance between the two. But I think because this windfall gain in taxation that the treasurer and the government may have been able to put off some harder decisions, and they were able to fund more welfare payments and cost-of-living relief. So I think this windfall gave the treasurer a little bit more flexibility than what he thought he would have. But overall, I think it's more of a balanced budget than either austerity or expansionary.

Dr Jane Rennie:
If it's not an austerity budget though, would it be accurate to say that it did nonetheless turn the dial a few degrees closer to one?

Gavan Ord:
Yes, I think that's a pretty good summary of the budget. Yes, it's not austerity, but it is sort of moving in that direction, but maybe not as far as what we may have expected a few months ago while tax receipts were looking pretty grim. So yes, the dial has been moved a little bit towards austerity, but it's not fully there.

Dr Jane Rennie:
What about you, Elinor? Gavan's mentioned the word balanced. Do you think the government got the balance right when it comes to fiscal policy in terms of where Australia is now in the economic cycle?

Elinor Kasapidis:
Yes, yes, they did. While some commentators might argue that more should have been handed out instead of creating a surplus, I commend the government and Chalmers on actually retaining the surplus. Fiscal restraint is important in a high inflation, low-unemployment economy. But also, if you think about government budgets, if it were a business running deficits year after year after year, at some point you've got to think about, well, how will we turn this ship around? This surplus creates some capacity to start thinking about a bit more targeted and restrained spending, and that discipline is really important.

Dr Jane Rennie:
So does that mean, Elinor, it's appropriate that the government should use the surplus to pay down Australia's national debt, or indeed actually potentially put it towards a longer term economic agenda, given that it has created those options?

Elinor Kasapidis:
It's good to have options. And I think when you look at the geopolitics of the world, a lot of the uncertainty that remains still around the global economy, having a bit of a war chest, not literally, would be good. And that way, that economic reform agenda and certainly the capacity of the Australian economy, and just our society to withstand any pressures. You want to have that up your sleeve in case things will change. And like I said before, that level of uncertainty is probably here to stay. Gone are the days where you could actually plan things for decades in advance and actually have them happen the way that you wanted. So I think just starting to build that capacity within the government to start to think about economic reform as well as things like the energy transition. It's going to cost a lot of money, so where is that going to come from and how will that be paid down by future taxpayers?

Dr Jane Rennie:
Well, let's talk a little bit about cost of living pressures now. They're certainly top of mind for many Australians. CPA Australia recently polled our social media followers on what the government should make the key issue of this budget. And with over 1300 votes, around three quarters said cost of living. Compounding the pain felt by many last week, the Reserve Bank raised rates of further 25 basis points to 3.85 and that's on top of 10 consecutive rate rises in the past year. So the central dilemma for government was how to negotiate the cost of living crisis without adding to inflationary pressures. Elinor, how did the government approach this issue?

Elinor Kasapidis:
It's good to see that the government targeted the benefits towards those who are struggling the most. So we heard about job seeker payments, making sure that there's access to affordable medical advice. And while many middle-income families are feeling some pain, inflationary pressures mean cutbacks across the board, including the government. So we are very supportive of making sure that our most vulnerable and affected are supported, and this government has done that.

Dr Jane Rennie:
Gavan, Can you give us a bit of a summary of some of the specifics that are in the budget to address cost-of-living pressures?

Gavan Ord:
Yeah, so just picking up on some of the major announcements. So there's a help with power bills for lower-income households and small businesses. We don't know the full details of this because it has to be worked out between the federal government and the states. But for lower-income households, it's up to $500 of support for electricity bills. And for small businesses, up to $650. Details to come. There's going to be an expansion of the single-parent payment, and I think parents will be able to still receive single parent payments for children after 14 years of age, from the current eight. There is an $40 fortnight increase to JobSeeker and other payments like Austudy. And also, there'll be additional targeted assistance for JobSeeker recipients over 55. There's also an extension or increase in the Commonwealth Rent Assistance payments and also on some more specific areas, the government's paying for a 15% pay increase for aged care workers. That's a quick summary. Oh, sorry. And I did forget to add that they're tripling the bulk billing incentive, so maybe that'll lead to more people being able to access bulk billing.

Dr Jane Rennie:
These seem like quite targeted relief measures, and that I would have to say is a bit of a change from the more expansive approach we've seen to social welfare in recent years, which in many times, delivered direct assistance to middle-income households. Gavan, what's your take on this?

Gavan Ord:
Well, I think, as Elinor said, this is very targeted and it's appropriately targeted. It's lower income and the most vulnerable in the community that are most affected by cost-of-living pressures, and I think they need to be supported first and foremost. And so I think it's targeted. Middle-class welfare can have inflationary impressions, so I think it's very much the best option. And as Elinor said, at CPA Australia, we support what the government's done in targeting these cost of living relief measures. Jackie Blondell: If you're enjoying this podcast, you should check out our in-depth business and finance show INTHEBLACK. Search for INTHEBLACK on your favourite podcast app today. And now, back to With Interest.

Dr Jane Rennie:
Elinor, we do now have the end of the low and middle-income tax offset. For middle-income households. Would they feel perhaps like they've been left out then?

Elinor Kasapidis:
It's been a double dip for the past couple of years, where those particular tax brackets got a tax cut, and then the offset was extended. Now it's basically a reversion back to what was planned. And the low-income tax offset does remain. So once again, it's consistent with the government's approach to targeting the support to the most vulnerable in our community.

Dr Jane Rennie:
Can I just clarify that? So the middle-income offset has ended, but there is a low-income offset which is still in place?

Elinor Kasapidis:
That's correct.

Dr Jane Rennie:
Since we're talking about tax, in another poll ahead of the budget, we asked people what form they thought cost-of-living assistance should take and the most popular choice with over a third of votes was targeted tax relief. Elinor, are there any tax measures in the budget that might ease current financial pressures on taxpayers, whether they're individuals or small businesses?

Elinor Kasapidis:
Yes and no. It was fairly limited. One thing is that the stage-three tax cuts have been retained. There was media in the lead up, Albanese reassured us that they would be retained, and they remain in place. The small business instant asset write off, that was a surprise announcement and it's very gratefully received. I think there was a bit of uncertainty about how that might continue. There's the small business energy incentive. And while these are not actual tax concessions for small business, they do help businesses keep their tax affairs on track. And they are the small business lodgement penalty amnesty, the small business unpaid tax and super funding to target those that are building up debts with the Tax Office, and a reduction of the pay-as-you-go and GST instalment uplift factor, which will just ease some of those cash flow burdens throughout the year.

Dr Jane Rennie:
Elinor, I wouldn't wish to throw shade on the instant asset write off, but it is considerably smaller than the temporary full expensing scheme, which ends in June, isn't it?

Elinor Kasapidis:
Yes. So it's back to the times of the instant asset write off pre-COVID, and at least there's a $20,000 limit for 2023, '24, with an aggregated annual turnover of less than 10 million. So you can see the cut back in the scope of the concession, the $20,000 threshold will apply on a per asset basis. And when you think about it combined with the energy incentive, it does start to target or focus small businesses on where they might invest their capital

Dr Jane Rennie:
Rather than introduce a one-year instant asset write off, would you have preferred that the government did extend or make full expensing permanent?

Elinor Kasapidis:
For small business, yes. We have called for the extension of temporary full fencing. And I think with the government limiting small business to less than 10 million, so a reduction from that $50 million threshold, I'd say it's very small business in a sense. And what support is there really for medium and higher-growth businesses looking to expand? So better clarity, more support at the lower end. And of course, it is a timing difference. It's not like that money isn't eventually claimed anyway. So we would like to see something more permanent and easier for the smaller businesses and medium-sized businesses.

Dr Jane Rennie:
Gavan, as we've mentioned, some of these measures do only last for one year. We're still actually waiting for the Morrison government's technology investment boost from last May to be implemented. Given that it does take time for temporary measures like the ones in last night's budget to pass parliament, does this really limit the value they offer to small businesses?

Gavan Ord:
Look, it can, particularly you mentioned the technology and investment boost, I think it's, what, six weeks to go before it expires and hasn't even passed parliament. So where there is uncertainty like that, businesses are not going out and investing in technology. So to add to that certainty, I think the government needs to pass through parliament the instant asset write off very quickly, so businesses know that they can go out and spread money. And also the small business energy incentive. That needs to get through parliament very quickly so that people can start to plan and invest. And just on the energy investment incentive, it is for one year and all the assets as people know in tax, they must be installed ready for use by 30 June, 2024. If you're looking at electrification of ovens and things like that, is there enough tradies out there to instal the equipment? Do we have these assets in Australia that can be purchased and be installed, ready for use by 30 June during next year? So the quicker the government and the parliament can pass these laws, the more certainty that our members can advise their clients to go out and actually start accessing these incentives. But I wouldn't be advising clients to start accessing these incentives just yet because it's still got to pass through parliament.

Dr Jane Rennie:
Elinor, the budget announced the implementation of a 15% global minimum tax and a domestic minimum tax. What are these measures and what do they mean for Australian businesses?

Elinor Kasapidis:
The 15% global minimum tax and the domestic minimum tax, the result of work at the global level under the base erosion and profit shifting work undertaken by the OECD, so it was. Expected in a nutshell, it basically means 15% global minimum tax for large multinational enterprises with a turnover of above 1.2 billion, and a 15% domestic minimum tax. And really, for many Australian businesses, it's not necessarily going to affect them, but many Australian taxpayers and citizens have been very interested in multinational taxation. So this is probably something that's consistent with actions taken around the world.

Dr Jane Rennie:
And while we're talking tax, are there any other measures you'd like to mention for our listeners here?

Elinor Kasapidis:
A bit of a laundry list, but there are changes to part 4A, the general anti-avoidance rules, to include foreign schemes or schemes associated with foreign benefits. FBT rules for electric vehicles and plug-in hybrid cars will change. Managed investment trust withholding tax concessions. And in particular build-to-rent properties. There are new concessions for that to encourage build-to-rent. In the news, you would've all seen PRRT, petroleum resource rent tax, has also had some changes to it.

Dr Jane Rennie:
Well, I want to talk a bit more about small business now. Gavan, you felt that last October's budget was light on support for small businesses and I think you've hinted heavily how you feel about this one in terms of small business support, but is there a bit more meat on the bones for those who own or operate a small business?

Gavan Ord:
There are a few other initiatives in there. I like to call out the cyber wardens initiative. So build the cybersecurity capacity of small business, I think that's a positive announcement. There's also changes to what was the entrepreneurs programme, which will provide funding for certain small businesses to implement new ideas, new forms of technology. So there are some positives there, but if I'm a small business person struggling through a high-inflation environment, struggling to find staff, struggling to maintain margins, I would go away thinking, apart from the energy relief payment, the $650 I mentioned before, I'd be thinking, "Oh, there's not much in this for me. How am I going to get through this period?" So as hopefully listeners have heard before, we've been suggesting the government fund a programme to encourage businesses to seek advice from their advisor of choice. I think that can be really beneficial to business because what we keep finding in our small business survey is that particularly at the micro and very small end, a lot of small business owners don't necessarily have the skills or the time to improve their business. And the best people that can actually do that for them is their advisors. So in troubled times, we think the government could do a little bit more to help businesses through these troubled times.

Dr Jane Rennie:
And Gavan, does that suggest then that the government needs to adjust its vision from the immediate travels to a longer-term vision for the small business sector?

Gavan Ord:
I think this is something where you can walk and chew gum at the same time. You can actually look at and manage current issues, but also have an eye on longer-term issues. So yes, I think the government could do more in terms of some of that longer term vision for the small business sector. How to make it more dynamic, how to attract more younger people into the sector, and how to make them more competitive, and how to make them more digital savvy. So these are not sort of one year at a time measures. And I note that the small business energy incentive, while good is only for one year, we do need a programme, a long-term vision, a long-term programme of activities, which builds the capability of Australian small businesses, so that not only can they get through this period, but can grow after this period ends.

Dr Jane Rennie:
There were a couple of measures in the budget about superannuation and some of these like changes to super balances of over 3 million, received quite a lot of publicity, so I won't go into them. But I do want to ask you about changes for non-arm's length income, also known as NALI, and how that affects superannuation fund members.

Gavan Ord:
Yeah, so this is a bit of a mixed bag when we saw this in the budget papers. On the good side, and the good news is for members of APRA funds, their funds no longer have to worry about the impact of NALI, non-arm's length income, whether they're general or specific. There is some good news for members of SMSFs and small APRA funds, since income is subject to tax at the NALI rate will be limited to two times the amount of the breach, rather than I think being a non-complying rate, which is at the highest margin rate of tax. Also, fund contributions will no longer perform part of the income figure, which is subject to NALI, which means that contributions can no longer be potentially eroded by the breaches. Additionally, any funds who incurred NALI expenditure prior to 2018, '19 will be exempted. So that's a good sign. However, for SMSFs and small APRA funds is not such a good picture because they will still be subject to the NALI provisions in the event of a breach involving a specific expense. And under current ATO advice, this could affect taxation of both the income from the asset, as well as any capital gains indefinitely into the future. So we very much have a separate two tax rules system, one for APRA funds and one for SMSFs and small APRA funds. And that's something we are very uncomfortable with.

Dr Jane Rennie:
Gavan, looking at the economic road ahead, you've already mentioned a little bit about the forward economic outlook for Australia. Is it consistent with the global economic forecast?

Gavan Ord:
Yes, I think it's consistent with the global economic forecast. We are seeing, if we look at say the major economies, the US, Europe and China and Japan, they're all going through a period of slowing growth, or in some instances, recession. So I think it does reflect the current economic environment, and it's still a very uncertain economic environment. Any number of crises could emerge. And I think Elinor spoke about we have an very uncertain environment. So I think a surplus gives it a little bit of that buffer in case a new challenge emerges, an unpredicted challenge emerges.

Dr Jane Rennie:
Well, I thought we'd finish on a bit of a lighter note. There are always unknowns in the budget. Were there any budget measures that took either of you by surprise or that you thought a bit quirky? Elinor, let's start with you.

Elinor Kasapidis:
I have a couple. There was 1.1 million for the ATO for communications research associated with the myGovID brand, and I look forward to hearing the results of that research. The government will also be providing $20 million next year to contribute to priority actions of the National Soil Action Plan, which is one that I didn't know that we had.

Dr Jane Rennie:
That's a new one on me too. Gavan, what about you?

Gavan Ord:
Well, if there's any number of things which seem unique and different when you look through the budget papers, it's a bit hard to call out specific ones because often there's a good deal of thinking behind it, but that just doesn't come out in the budget papers. What I will say is a reflection on the budget papers is there's less and less information in budget papers now than ever before, and this is not just something with the current government. It's been a trend over the last few years. And I think the call out to government is put more information back into the budget paper, so we don't see things like the $1.1 million going to the ATO to research the myGovID brand. What was the basis for that? We really need to know because it could be a very good reason for spending that money. So in terms of lighter notes, I was in the budget lockup, the food wasn't great. And always as a rule of thumb, the quality of the food in the budget lockup indicates how good or bad the budget is. The better the food, the worse the budget. So I think when they're planning the catering for this budget and they went, "Yeah, this is okay budget, people are not going to be upset, maybe not so happy. So let's just keep it pretty much to canapés rather than a full three-course dinner."

Dr Jane Rennie:
Well, that brings us to the end of our federal budget 2023 special edition of With Interest. Thank you to Gavan Ord and Elinor Kasapidis for sharing your expertise with us. For our listeners, a range of expert CPA Australia budget analysis is now available, including a special edition of CPA Tax News, an article in INTHEBLACK, a budget webinar, which goes into the specifics of the budget paper, and our budget media release issued last night. To find all our content, visit cpaaustralia.com.au and type federal budget into the search bar. From all of us here at CPA Australia, thanks for listening.

Garreth Hanley:
You've been listening to With Interest, a CPA Australia podcast. If you've enjoyed this episode, help others discover With Interest by leaving us a review and sharing this episode with colleagues, clients, or anyone else interested in the latest finance, business and accounting news. To find out more about our other podcasts and CPA Australia, check the show notes for this episode. I hope you can join us again for another episode of With Interest.