Federal Budget 2018-2019: Impacts on small business - initial assessment

From a small business perspective, the Federal Budget delivered by Treasurer Scott Morrison last night has some good indicators - but there are influencing variables yet to be seen.

Overall, modest tax relief to workers, combined with significant infrastructure projects to help stimulate domestic economic conditions and an earlier than expected return to surplus forecast should all combine to help provide businesses with a sense of optimism to continue to invest and create jobs.

SMEs also benefit from the Government's decision to extend the $20,000 instant assets write-off until 30 June 2019.

A simplification of GST reporting will see the number of BAS questions reduced to three.

Education and wage subsidies to encourage older and mature workers to stay and participate in the workforce is another plus.

However, the extent of Opposition support for the package, particularly the personal income tax overhaul, is uncertain. How consumer confidence will respond given this is considered to be a pre-election budget, is also a factor to be determined.

Local Area Marketing Business, Research & Economic Analysis Manager, Hagop Tchamkertenian

Local Area Marketing Business, Research & Economic Analysis Manager, Hagop Tchamkertenian's initial budget assessment following provides an insight for small business owners.

The key themes of the 2018-19 federal budget are: a stronger economy; guaranteeing the essential services that Australians rely on; keeping Australians safe; ensuring the Government lives within its means.

These themes and principles are sound and are designed to evolve into powerful political messages during election time.

The principles help reinforce Coalition values and importantly are cleverly structured to ensure the budget measures do not antagonise any special interests with the ABC; newly arrived migrants, refugees and manufacturers of brand name medicines being the few exceptions subjected to budget cuts.

The pre-election budget delivers tax relief for low and middle income earners and outlines a seven year plan to deliver tax relief across all income groups. There is also the commitment of extending the company tax cuts to large businesses.

A $75 billion 10-year infrastructure plan including $24.5 billion in new nationally significant transport projects is a welcome development as it will deliver essential infrastructure over the long term, close the infrastructure gap whilst creating jobs and helping to stimulate economic growth in the medium term.

The main area of proposed reform is personal income taxation comprising three elements. The first component of the plan involves tax relief for lower and middle income earners. The second protects income against bracket creep - the process of inflation pushing tax payers into higher marginal tax rates; and the third component aims to deliver a flatter tax structure by abolishing the 37 per cent tax bracket.

Other budget initiatives include giving the ATO the capacity to reunite Australians with their lost and inactive superannuation to help boost their balances at retirement; limiting fees on low balance superannuation accounts; banning superannuation fund exit fees; and tailoring superannuation insurance arrangements based on the principle of "opting in" - ideal for those with low balances.

Small businesses will benefit from the Governments decision to extend the $20,000 instant asset write-off until 30 June 2019.

Measures to target tax evasion such as the black economy and making multinationals pay their fare share of tax by ensuring income earned in Australia is taxed in Australia are included.

The budget is forecast to return to surplus a year earlier, 2019-20, when a modest surplus is projected. Interestingly, revenue as a proportion of GDP is projected to rise from the estimated 25.1 per cent in 2017-18 to 25.5 per cent by 2021-22 - the highest proportion since financial year 2005-06.

Household consumption is forecast to rise from the 2.6 per cent rate in 2016-17 to 3.0 per cent in 2019-20. Total business investment is forecast to grow at 4.5 per cent by 2019-20 driven by both mining and non-mining investments.

Inflation is forecast to remain well within the RBA target band of 2-3 per cent whilst wage inflation is forecast to modestly pick up in 2019-20 when it is forecast to reach 3.25 per cent.

Employment growth is forecast to be weaker at 1.5 per cent by 2019-20 compared to 1.9 per cent growth rate observed in 2016-17 and the 2.75 per cent forecast for 2017-18.

Despite weaker employment growth and relatively stable labour market participation rates, the unemployment rate is forecast to decline from 5.6 per cent rate as reported in 2016-17 and the 5.5 per cent rate expected for 2017-18 to 5.25 per cent by 2019-20.

So what does it all mean to business and importantly small business?

The budget strategy will stay on track if global economic conditions continue to improve and the Australian economy benefits from strong commodity prices. The non-mining sector is expected to continue investing and creating jobs which is crucial to the strategy of returning the budget to surplus by 2019-20.

Real GDP growth of 3 per cent and critically the forecast strengthening of household consumption expenditure should support domestic economic activity.

The tax cuts to low and middle income earners, whilst modest, should also provide economic Source: 2018919 Budget Papersstimulus as the target groups are likely to spend most of the tax cuts that come their way.

New personal tax rates & thresholds 2018-2019, 2022-23 and 2024-25

Source: 2018-19 Budget Papers

With inflation forecast to remain subdued and wage inflation at best forecast to remain modest, businesses are unlikely to face significant cost pressures in the next couple of years.

If the budget succeeds to lift consumer confidence, businesses will be able to reap additional dividends from the 2018-19 federal budget via consumer spending.

A final observation concerning the personal income tax package is warranted. The tax reform measures the Government is planning are significant and principled as it is aiming to simplify the system by reducing the number of tax brackets. It also wants to incentivise people to enter the workforce as well as those in the workforce by flattening the tax structure so bracket creep does not force them into higher tax brackets.

These potential benefits come at the expense of making our personal income tax system less progressive and by definition more regressive.

Whether the the tax plan is implemented in its entirety is also uncertain as the Opposition has only indicated it will be supporting the initial tax cuts to low and middle income earners. Given its ideological views, it is hard to see the Opposition supporting the overhaul of the personal income tax system to make it less progressive.

From a business perspective any budget that forecasts improving economic conditions is a welcome budget.

Modest tax relief to workers, combined with significant infrastructure projects to help stimulate domestic economic conditions, and with the budget forecast to return to surplus a year earlier then previously expected, should all combine to help provide businesses with a sense of optimism to continue to invest and create jobs.

One significant unknown factor remains consumer confidence. How will consumers respond to the measures and offerings announced in the budget (or what the majority of commentators have depicted as a pre-election budget)?

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