The government will be handing down its Mid Year Economic and Fiscal Outlook (MYEFO) at lunchtime today, and there is little optimism around. Analysts are predicting a blowout in the budget deficit, revenue shortfalls and the potential for ratings agencies to knock off the country’s AAA credit rating in response to the economic update.
As Treasurer Scott Morrison delivers his speech and the post-mortems begin, here are four key elements the SME community will have an eye on.
How deep can the budget deficit hole go? That depends on who you ask.
The May budget had forecast a deficit of $37 billion for 2016-17, but commentators, Labor and members of the crossbench have been near certain of a blowout, which could be as high as around $40 billion for the year, as Deloitte Access Economics’ Chris Richardson told the ABC this morning.
Whatever the final number, the focus for those watching business confidence will be on when we’re expected to emerge from deficit overall, and whether ratings agencies will respond before Christmas by downgrading the nation’s credit rating if it looks likely the country will stay in deficit beyond 2020-21.
Read more: Tax reform for small business takes a step back in “moral” budget repair challenge
“With no key policy announcements in the MYEFO, any change to the fiscal trajectory will reflect the underlying economic assumptions,” an ANZ research paper said last week, acknowledging that the 2016 budget’s assumptions for commodity prices were lower than what we’re currently experiencing.
The 2016 budget had iron ore at $US55/tonne, for instance, but it’s hit $US80/tonne over the past month. The business community will be watching for Treasurer Morrison’s wording on commodity prices, with Finance Minister Mathias Cormann telling media this morning recent price strength will not be enough to make up for low wages growth, tax receipts and company profits.
When the government introduced the first budget policies in its Omnibus bill in August, Prime Minister Malcolm Turnbull positioned budget repair as a “moral” challenge—and while the SME community largely believed at the time the rhetoric was right, they were sceptical about whether real reform on multinational tax collection, job creation and long-promised small business tax cuts would ever come to fruition.
There are no shortage of suggestions out there on how the government should deal with the budget black hole in the long term, but there’s little expectation that this year’s MYEFO will contain big new policy announcements. Instead, the conversation will likely be more about the terms of trade, unemployment figures, commodity prices and the current state of tax collection.
However, that hasn’t stopped calls for broader reform. John Daley and Brendan Coates at The Grattan Institute said in Fairfax today that too many government policies still benefit seniors, costing tens of billions of dollars a year that politicians have been reluctant to reign in.
And while new approaches to tax collection might not get a central billing today, some tax specialist argue the current system isn’t helping matters.
BDO Tax Partner Mark Molesworth says the current Australian tax system is not appropriate for collecting revenue in the 21st century, with BDO calling for an independent tax body that can drive reform in the area.
“There is no point in fiddling with tax cuts while ‘Rome burns’. What is now needed is for the government to reimagine the problem and deal with the structural issues in the tax system, without special interest groups forcing them to only tinker around the edges,” Molesworth said in a statement this morning, highlighting that interest groups have had too much influence on persuading the government on specific taxation policies.
One year on from the release of Malcolm Turnbull’s innovation agenda, members of the small business community will be watching to see if policies for driving growth through new companies will form part of the economic discussion today. However, with the first suite of innovation policies still being enacted, that seems unlikely.
Last week Minister for Innovation, Industry and Science, Greg Hunt, told Fairfax the next two waves of the innovation agenda would be rolled out in 2017 and 2018, and will include with trade missions to China and the US to strengthen ties with potential investors in those regions.
However, there’s still a number of policies from this year’s innovation push that will be realised in the new year after being signed off on the final few sittings days of parliament early in December, including the operation of the CSIRO innovation fund.
The MYEFO statement will be released at noon today in Canberra.
