Being one of the very few people in the real world who will have actually bothered to read it and follow the numbers, I hope that I can interpret the messages that it is trying to send.
The most obvious thing that political pundits are talking about is the boost to small business. The budget gives a 1.5% cut in the rate of company tax to businesses which have a turnover of less than $2m. The last time that there were different rates in company tax was before the stability program of 1995-96 when all companies were taxed at a flat rate of 36%. Having two separate rates is not only a problem when it comes to working out things like franking credits it also creates real headaches for those businesses who hover around the $2m turnover mark.
A business which makes a turnover of $1,999,999 would be subject to a tax rate of 28.5% but jump to that next dollar at exactly $2,000,000 and they cop the full 30%.
If we assume that two businesses had $0 in expenses (which is in itself stupid) then the $1,999,999 business would pay $569,999.71 in tax but the $2,000,000 business would pay $600,000 in tax. The stupidity is that for earning $1 extra, the $2,000,000 business pays an extra $30,000.29 and its net position is $29,999.29 worse off, just because it happened to take $1 extra in revenue. Scrooge McDuck would be well advised to load his unlucky number twenty million dime into a cannon and hurl it as far away as possible because in losing ten cents he gains almost thirty grand.
Unincorporated businesses with turnover of less than $2,000,000 are only subject to a tax rate of 25% which seems like a blessing until you realise that the individual's net taxation position is going to change because they'd only be pulling 25% franked dividends from their business and not 30% franked dividends. This makes planning difficult but not necessarily impossible.
Actually, the 5% discounted rate of taxation for unincorporated businesses is problematic into that it is difficult if not impossible to work out exactly who in the world that this would even apply to. Companies are naturally subject to Company Tax (duh) because they are Companies. Yes, that sounds like the most idiotic statement in the world and you'd be right, if it wasn't for the fact that Companies are separate legal entities from individuals. Unincorporated businesses are usually sole traders who are still subject to Individual rates of taxation or Partnerships which although need to complete a separate taxation return, aren't legal entities in their own right and consequently distribute profits to Individuals and Companies which then report that income in their respective taxation returns. Partnerships which already pay zero taxation in their own right, receive no benefit whatsoever in any reduction of taxation rates. How can they? Such a proposal is a nonsense. The only possible business structure which might benefit from a 5% reduction are Limited Partnerships and the only business which employ that sort of structure on a regular basis are small law firms. Is that the point of the discounted rate? To give a leg up to the legal profession?
There is also an increase in the amount which can be instantly written off, from $1,000 to $20,000 but only for two years. Mr Hockey who hated and opposed the Rudd Government's stimulus package post GFC, has now in this budget written a different sort of stimulus package. The intent is that small businesses will now go out and buy plant and equipment and that the money spent will have a multiplier effect in the economy. That's all good and proper until you realise that Australia doesn't really produce very much machinery which could be used as plant and equipment any more. In December of 2013, Mr Hockey himself from the floor of the House of Representatives openly dared the motor manufacturers to leave Australia and within the week, all three announced plans to close Australian manufacturing. This sort of trend where firms leave Australia to pay manufacturing workers cents per hour instead of dollars, explains why it is mostly impossible to purchase any big ticket item that was produced in Australia. Computers, pizza ovens, forklifts, fridges, tyre balancers, lawn mowers, cars - its hard to think of any item of plant which costs less than $20,000 and was made in Australia. I'm wondering if through operation of policy, this instant write off of plant might lead to an increase in payments for imported goods; all subsidised by the taxpayer.
On the revenue side of the budget, I find Mr Hockey's estimates of taxation revenue over the next few years to be quite a bit bullish but I don't know why. During the height of the mining boom, Treasury tended to underestimate the amount of revenue that would be collected and now that we live in a post mining boom and post GFC environment, revenues have tended to be rather overestimated. I think that the expected figures for growth in taxation revenues are 2.75% for 2015-16, 3.25% for 16-17 and as much as 5.50% for 17-18. Now admittedly the economy is cyclical in nature but I just don't see how you get increases in taxation revenue to that degree if you're also lowering the rate of taxation for small businesses, whilst at the same time giving them an instant tax write off for purchasing plant and equipment.
The idea that you collect more in tax by lowering tax rates was proposed by an American economist Arthur Latter; his idea took the shape of a bell curve upon which by moving the rates of taxation, you hope to move closer to the top of the bell. The flaw with this is that nobody can really empirically measure where you are on the curve, nor what the actual shape of the curve is. Mr Laffer originally sketched his idea on the back of a napkin, which is probably where it should have remained. I just don't know if napkin sketches should become the basis of economic theory or taxation policy.
If we were to look at where taxation revenues are to come from, there appears to be a shift away from taxation revenues from mining and this is hoping to be replaced by revenues from personal income taxes. One can only assume that this comes about through either increases in real wages (which is still trending downwards), increases in the participation rate which is what the tinkering with child care is about, and through natural bracket creep. Over the forward estimates that the budget lays out, government spending which is still higher as a percentage of GDP than most years of the Rudd/Gillard governments and every year of the Howard Government barring 1996-97, shrinks only marginally from 25.9% to 25.3% of GDP. This is mainly a bet that public service wages and pension payments will grow less slowly that overall GDP growth and that GDP growth will outstrip inflation.
The core messages of this budget appear to be sort of bumbling along without giving anyone the irrits, in the hope that the government will be reelected in the latter half of 2016 or January 2017. By mainly targeting small businesses, farmers and issues like childcare, it wants to send happy bright sentiments to that portion of the electorate who they hope might start thinking about voting Liberal or National.
It's also worrying that about $1.6bn is going to be cut from the welfare budget over four years and $3.7bn will be cut from foreign aid over the next three years. If where your treasure lives, your heart also resides, then this budget continues being cruel to be cruel.
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