Has Joe Hockey given companies a gymnasium leave pass? To some, it seems so. The government said on Tuesday it would cut company tax next year as planned, and while its budget spending cuts do include reductions in industry assistance, they are not as deep as cuts in other areas, notably social security.
Suggestions that business has been spared the heavy lifting are less easy to make, however, if the ways that this budget will affect the economy are considered.
Companies are not directly targeted by cuts to the public service, pensions and family payments, but they are still affected by them. Their ability to earn money, invest, expand and hire new employees is a function of their sales, and their sales growth is tied to demand, from households, other companies and the government, basically: all three are pressured by Hockey’s debut budget.
The biggest budget hits to household income are slated for the government’s second term, should it be re-elected. Households were already under pressure, however, and they are likely to spend less and save more now in preparation for cuts to come: Goldman Sachs economist Tim Toohey says that cuts embedded in earlier budgets combine with the new ones in Hockey’s budget to produce the most restrictive fiscal settings since Peter Costello’s first budget in 1996-97.
The hope, of course, is they will do what Costello’s budget did: get the government’s balance sheet back into the black, and lay the ground for sustainable spending and tax cuts in future years.
The risk, obvious to the government as it was drawing the budget up, is that the fiscal squeeze will create a downward spiral that connects declining household demand with delayed or declining corporate investment, job losses and further weakness in household demand.
Estimates of the fiscal ”drag” on the economy vary. Toohey expects the cumulative impact of Hockey’s budget and earlier measures to bear down on household income and clip economic growth by about half a percentage point in 2014-15.
Bank of America Merrill Lynch economist Saul Eslake says the budget is likely to only reduce growth by about 0.1 per cent in 2015-16 excluding internal payments such as the $8 billion injection into the Reserve Bank. It saves its biggest hit, 0.9 per cent of gross domestic product, for 2017-18 when pressure on the budget balance is higher, he says.
Regardless of the way it pans out, however, companies are not going to be immune. They are affected by the cuts, and their responses affect those who sell to them, including those who sell their labour.
The government’s declaration that company tax will be cut from 30 per cent to 28.5 per cent from July 1 next year as promised also needs to be balanced against its commitment to deliver another election promise, the paid parental leave scheme.
The budget confirmed that the income cap for the parental leave scheme would be cut from $150,000 to $100,000, but the government is still planning to levy large companies to pay for the scheme. The plan, apparently unchanged, is for companies with taxable incomes of $5 million and more to pay 1.5 per cent of their income. The government says the 1.5 percentage point corporate tax cut will offset the cost of the levy for big companies and boost the profits of up to 800,000 smaller ones, but it is the big companies that are the big taxpayers. They are about 0.5 per cent of companies by number, and paid net income tax of $37.6 billion in 2011-12, according to Australian Tax Office statistics, just under 60 per cent of the amount of corporate income tax collected.
The paid parental leave scheme, therefore, makes the corporate tax cut a much smaller concession, and a much smaller economic benefit.
The top end of town will be eyeing the Abbott government’s broader tax review next year, too. It will address the structure of the tax system, something the budget’s three-year, 2 per cent income tax surcharge for those earning $180,000 a year or more does not.
Eslake points out that the people being targeted are adept at finding low-tax structures, and the temporary surcharge encourages them to work harder at it.
Only 2.3 per cent of taxpayers were in the top income tax bracket in 2011-12. They earned 15 per cent of total taxable income, and paid 26.5 per cent of the income tax collected.
Eslake says more than a third of them received distributions from partnerships and trusts, however, and more than 28 per cent of them reported superannuation contributions beyond the compulsory 9 per cent level.
Top-bracket taxpayers also accounted for just over half of individual taxpayer capital gains, and 19.8 per cent of total negatively geared property losses. The revenue sugar-hit that Hockey’s temporary tax hike delivers would be replaced by a structural lift in tax payments if some of the low-tax thoroughfares that high-income earners are in the habit of travelling down were narrowed.
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