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7 Questions for businesses to consider for this year’s Federal Budget

From the Treasurer’s speech to the depths of Budget Paper No. 4, Australia’s Federal Budget appears impenetrable. But for some people, 29 March 2022 Federal Budget night is an opportunity to dive into the intricacies of how around half a trillion dollars in Commonwealth taxes and spending will be allocated, and how the Australian economy will be shaped over the next four years.

The timing of this Budget is significant. With Australians expected to go to the polls only weeks later, we’re also in a year of transitioning away from COVID-19 spending and on the road to decarbonisation and a reshaped geopolitical environment. Meanwhile, as inflation picks up – especially on fuel prices – the cost of living is likely to be a strong theme.

As we approach Budget night, here are seven questions to consider when it comes to understanding what’s announced.

1. What do Australian businesses and the community want from the Budget this year?

Traditionally, the run up to an election sees expansionary spending that appeals to different political constituencies, and maybe additional or promised tax cuts. So the question is: to what degree will this be reflected in the 2022 Budget?

A recent PwC survey of 1,000 adults found that they prioritised economic growth and lower taxes. But when asked what would shape their vote, those surveyed named economic management, leadership and health (not related to COVID-19) as their priorities.

Spending priorities in Budgets shift over time as different challenges are embraced. This year, I suggest that the upcoming Budget is likely to include more money to support necessary transitions, such as spending on green energy, hydrogen technology and digitisation, and increased defence spending.


2. How is Budget spending being weighed up with Budget restraint?

I’m interested to see how the Federal Government decides to prioritise spending in a way that supports both short and long-term outcomes for Australia.

The Budget’s bottom line has improved a lot in the past year so the Government can afford to release its purse strings yet still take an apparently conservative approach.

Stronger than expected labour market outcomes (including higher income tax receipts and lower welfare spending) meant this year’s projected $61.8 billion deficit fell to $45.8 billion in the December Mid-Year Economic and Fiscal Outlook (MYEFO), and is now a deficit of $39.1 billion.

This improvement allows the Government to try and have the best of both worlds because it can still improve the fiscal outcome (such as by having a lower deficit than it projected in May last year) while increasing spending above current levels.

There is no need to swing the Budget back to surplus immediately, but a path to normalisation needs to be laid out to reinforce that the days of easy money are past.


3. How fast is Australia keeping up with a changing world?

There is a general consensus that we are now in a transition period on a number of fronts.

Trade tensions with China, and supply chain disruptions arising from COVID-19, as well as the current geopolitical crisis, have all reinforced the need to reconsider market and supply chain risks. While this is principally an issue for business to address, it will be interesting to see how the Budget prioritises spending to:

  • support the onshoring of some activities in strategic industries, such as health and military equipment
  • invest in trade support to encourage businesses to find new market opportunities to diversify single country risks, particularly focusing on strengthening trusted supply chains with credible & trusted partners and nations
  • grow new industries in which we may have emerging comparative advantages, such as critical minerals and green advanced manufacturing.

Meanwhile, the Government’s commitment to sourcing renewable energy and net-zero greenhouse gas emissions by 2050 still lacks detail. What will the Budget say about policy clarity and certainty, particularly on climate change? Will the Budget reveal what infrastructure is being prioritised to support energy transition?


4. What’s in the Budget and what’s still in the kitty for election announcements?

The most recent MYEFO showed $15.9bn in expenditure for decisions ‘taken but not yet announced’, and ‘other spending not for publication’ (for example, where there are commercial or security sensitivities). At that time, Treasury officials suggested the split was about 50-50 between these two categories.

Compared to last year, there is more than $900 million extra in ‘decisions taken but not yet announced’. So it’s possible that not all the spending goodies will be revealed in the Budget, even though funding has already been allocated for them, and instead will be announced pre-election.


5. What is the Budget demonstrating about the Government’s reform agenda?

No one expects a reform-oriented Budget in an election year and I’m sure that will hold true for the upcoming Budget.

Even before the fiscal challenges of COVID-19, on multiple occasions, PwC has expressed concerns about the ability of future Budgets to cope with changing demographics, environmental expectations and technologies.

For example:

  • the Budget’s over-reliance on personal and corporate taxes, rather than more broadly applied consumption taxes, means we have a tax system that is less efficient and can occasionally even disincentivise productivity and economic growth
  • the inevitable shift to electric vehicles challenges the feasibility of the $20 odd billion that we currently collect in fuel excise
  • more needs to be done, through direct spending and/or tax relief, to stimulate women’s participation in the workforce participation.

Also, other major spending reforms, particularly aged care and the NDIS, are still in a state of relatively early implementation and likely need further adjustments.


6. What’s not being said?

Budgets are carefully curated to maximise the optics of what is being done, regardless of which side of politics is in power. Sometimes what is not said is more interesting than what is.

For example, we see a lot of double-counting of new infrastructure from year-to-year, and during COVID-19 we saw underspending on projected infrastructure projects due to labour market constraints and supply chain disruption. So I would suggest caution when comparing the claimed size of the ‘infrastructure pipeline’ across annual Budgets.

Another common Budget tactic is to use vignettes about impacts on households such as a family with two working parents and a child at school and another in childcare. I think it’s also useful to consider what the impacts may be on differently-formed households.


7. Formulating a view over the next four years requires a raft of assumptions.

These address a range of issues such as exchange rates, the trade‑weighted index, iron ore and coal prices, interest rates, world oil prices, and population growth.

In a time of geopolitical and health-related instability, it is worth keeping an eye on how plausible these assumptions look, and whether risks of getting them wrong are more likely to be on the upside or downside.

One area worth monitoring is Treasury’s assumptions regarding the iron ore spot price. In the past two Budgets, Treasury’s forecasts for iron ore have assumed different time periods for reaching the same price:

  • in the 2020-21 Budget (October 2020) – a decline to US$55/tonne free on board (FOB) by the end of the June quarter 2021
  • in the 2021-22 Budget (May 2021) – a decline to US$55/tonne FOB by the end of the March quarter 2022.

Forecasting commodities is notoriously risky, particularly given our current geopolitical uncertainties, and there is value in being conservative. But there is also a need to paint a realistic picture of the year ahead. It will be interesting to see what picture Treasury paints this year.


Solving important problems

On Budget night and the media coverage that follows it, I expect the new announcements that impact the hip pocket will be top of mind for most people as they prepare to vote in an election that’s timed to occur just a matter of weeks after the Budget.

However I’m also interested in how the Budget helps to solve the most important problems facing Australia and sets us up for a future that could look substantially different to how everyone might have expected only a short time ago.

Source: PwC

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