The Balancing Act

It looks like the federal government has finally delivered a winning budget.

I usually look forward to budget week. This one has been no exception. Given that this budget will lead into an election campaign I was somewhat concerned that the government might pork barrel and I’m pleased that they appear to have resisted the temptation to do so.

It will be interesting to see what the opposition makes of the government’s efforts. The government has left a few convenient openings for the opposition to attack but it remains to be seen if Shorten takes the bait.

Shorten could attack the government for not doing more to fund health and education. This is the traditional strength of the Labor party. To attack here though leaves the opposition vulnerable to a counterattack suggesting that the Labor party isn’t fiscally responsible. 

Alternatively Shorten could attack the increase in the tax bracket from $80,000 to $87,000 for middle income earners. This will play to entrenched supporters of the Labor party but it will do little to win over middle class Australia. Furthermore, a relatively high proportion of those earning less than $80,000 a year already receive more in benefits than they pay out in tax. The government won’t point this out. They don’t need to.

From the governments perspective there are two substantial wins in this budget. Like many of the best initiatives they are very simple. Despite their simplicity their consequences could be far reaching.

The first of these is the reform of the company tax rate. The government is reducing the rate from 30% down to 27.5% from July 2016. The rate will continue to fall until it reaches 25% by 2027. The clever part of this reform is that the reduction only applies to small businesses with an annual turnover of less than 10 million. 

This encourages existing small businesses to expand thus potentially creating employment opportunities. It encourages people to start new small businesses. Most importantly it doesn’t deliver a tax break to larger businesses and for this reason it avoids the criticism that a company tax break is helping the ‘big end’ of town.

The second win is the reform to the superannuation system. It’s early days but in my view this is a truly clever reform. The Government is capping the amount people can transfer into tax free retirement phase superannuation accounts at $1.6 million and imposing a lifetime cap on non-concessional contributions of $500,000.

No doubt there will be some particularly unintelligent people who will suggest that a $1.6 million cap is too high. To put this criticism in perspective a five percent return on $1.6 million is $80,000. That is more than enough for a comfortable retirement but it is not so comfortable that someone earning that amount could be accused of being very wealthy.

The lifetime cap on non-concessional contributions prevents the wealthy from reducing their overall tax burden by diverting much of their wealth to superannuation where it is taxed at a much lesser rate than their income. The wealthy abusing the superannuation system was one of the prime criticisms of the existing system.

The only small criticism I would make of the new super changes is that the capped amount should be increased in line with inflation every year. This ensures that the figure remains reasonable into the future. The government may have already done this, that will be clarified over the coming days I expect as will the oppositions response to the budget which may yet provide us all with further cause for debate.