What to expect from the 2010 Federal Budget

What a difference a year makes. Just 12 months ago, Treasurer Wayne Swan and Prime Minister Kevin Rudd were framing a budget to steer Australia through what looked like the worst financial crisis in 70 years. 

This year they must deal with an environment that looks more positive, but remains difficult to read. While the economy is clearly in recovery mode, pushed along by a resurgent mining sector, questions remain about the state of the consumer and small business sectors.

And on top of all this, it’s an election year – which adds an extra political dimension to Swan and Rudd’s task.

The job of predicting what will be the key features of the 2010 Federal Budget has been made even more difficult by the fact the Government has a number of big agenda-setting reviews running all the same time.

The Government’s tepid response to the Henry Review would seem to leave little room for it to move in the area of cash at Budget time.

Similarly, the on-going review of the superannuation system by Jeremy Cooper is likely to mean budget measures around super are limited.

So what can we expect from this year’s Budget? Here are a few of the key features SmartCompany will be looking out for:

The numbers

Last year’s big-spending Budget, designed to insulate Australia from the GFC, put the Budget firmly in deficit in 2009-10, with the latest forecast from the Government suggesting a deficit of $58 billion. However, the improving economy and the new mining boom has economists predicting a much better number: ANZ is tipping a $48 billion deficit for 2009-10, while Westpac is tipping a $56 billion deficit.

However, the improving economic outlook means the Budget is expected to be back in surplus much earlier than anticipated. ANZ expects the deficit should be around $33 billion in 2010-11, before significantly improving to $15-16 billion in 2011-12. Most economists then expect the budget will return to surplus in 2013-14, two years earlier than previously forecast.

There is a caveat to all this, however. Commodity prices need to stay strong to ensure the Government’s tax revenue continues to grow in line with corporate profits.

The Government’s predictions on economic growth will also be important to watch. If the growth rates are high, that could give the Government room to spend a bit more in anticipation of improved tax revenue.

Tax

Yasser El-Ansary, tax counsel at the Institute of Chartered Accountants, describes this as an “all or nothing Budget” – either there will be a big reform agenda in the area of tax, or virtually no changes at all. After the Government’s lacklustre response to the Henry Tax Review, it’s a brave person who would bet on the latter.

Reports suggest a few small things might be on the agenda, including further efforts to simplify tax returns for businesses and individuals, as suggested by the Henry Review. As unlikely as it might be, any moves to increase the definition of a small business in the eyes of the Tax Office from under $2 million turnover to under $5 million in turnover would also be welcome.

El-Ansary would also like to see the Government commit to a review and reforms in the area of trust law, which remains mired in complexity and uncertainty.

Thankfully, there will be some small individual tax cuts as foreshadowed in last year’s Budget, with the 15% tax rate threshold increased from $35,000 to $37,500 and the tax rate for those earning between $80,000 and $180,000 falling from 38% to 37%. Don’t expect these tax cuts to be enlarged, however.

Superannuation

With a review of superannuation currently underway, and the Government already promising to increase the superannuation guarantee from 9% to 12% as part of the Henry Review, it’s hard to see exactly what the Government has left to do in the area of superannuation right now.

However, in the lead-up to the release of the Henry Review, there were strong rumours that the Government could increase the tax on superannuation contributions from 15% to as much as 30%. This is one area to watch closely on Tuesday evening.

The Institute of Chartered Accountants is hoping to see the penalties for those who inadvertently exceed the Government’s super contribution caps reduced.

Government assistance

Given the constraints on spending, this is another area where industry groups are hoping for action but not really expecting any.

At the top of the agenda for the Australian Industry Group is the Government’s new R&D tax credit system, which is set to start in July. Like many experts, AIG thinks the eligibility requirements remain too strict and would like to see the program opened up.

AIG would also like to see a boost to the Export Market Development Grant, which is popular but has been criticised for being underfunded in recent years. Finally, it wants an expansion of the Enterprise Connect program, which helps companies access Government assistance and provides mentoring and advice services.

Training and education

With a skills crisis looming, this is one area the Government is likely to throw money at – it’s a vote-winner with both business and consumers.

The Australian Industry Group is looking for more employer incentives for apprentices and more investment in the Vocational Education and Training Sector, plus improved numeracy and literary programs for workers.

Health

Another area where the Government has well and truly shown its cards. The $15 billion reform of the health system which has been backed by all the States except Western Australia is the showpiece of the Government’s policy agenda and leaves room for little else in the way of spending.

However, there does appear to be some cuts. Reports late last week suggested Australia’s drug companies have agreed to help the Government cuts its pharmaceuticals bill by $2 billion, an initiative that will be felt by pharmacies around the country.

Other measures

This Budget is likely to be full of lots of little tweaks and changes, primarily designed to cut spending. Suggestions include cuts to public services frequent flyer allowances and other reduction in travel expenses. These little items are worth watching closely – they are the ones that could have the biggest impact on your business.

SmartCompany editor James Thomson and reporter Patrick Stafford are jetting up to Canberra for the Federal Budget lock-up and will bring you all the news and analysis in a special bulletin on Tuesday evening. While Treasurer Wayne Swan has promised a “no frills” budget, entrepreneurs need to watch out for the smaller policy shifts that could have a big impact on their sector.