Faced with the political reality of not being able to pass substantive legislative reform, the government has focused instead on infrastructure spending and social issues in this year’s Budget.
Pitcher Partners welcomes the Turnbull Government’s efforts to back small business and invest in infrastructure to grow the Australian economy.
In particular, we welcome the Government’s extension of the $20,000 instant asset write-off for businesses with turnover of less than $10 million. But middle-market businesses, which are the backbone of the economy and account for around one third of jobs and one third of economic activity, have largely been ignored.
The Turnbull Government has once again missed the opportunity to make a real difference in the middle market.
It also seems that the word ‘innovation’ has been completely dropped from the Government’s lexicon. Instead there has been a real focus on new regulation and beefing up the resources of regulators to chase lost revenue, including significant funding increases to key regulators (ASIC, ATO and APRA.)
This Budget continues the intent of gradually returning to surplus over the medium term, with the Budget expected to balance in 2021, remaining in surplus thereafter. In making these assumptions, the Government is relying on continued strong commodity prices, and forecast increases to both wages and GDP, which seems bullish to us.
Significant investment of $75 billion towards key infrastructure projects over the next 10 years, focused around, road, rail and airport investments, will contribute to the government’s effort to drive jobs and growth. However, we remain cautious as to the potentially negative impact of planned changes around foreign investment and limits on deductions available to domestic property investors.
Our major concern on this front is that the Government has not given any indication of support for public-private partnerships, which we see as critical to ensuring that the construction and associated industries can grow as a result of this increased spend. The lumpiness of backing a small number of large projects – which are not shovel ready – means we can expect to see further peaks and troughs in economic activity.
On housing, we were pleased to see the release of government land, and the introduction of non-concessional superannuation contributions of up to $300,000 from the sale of the homes of older Australians downsizing. Both these initiatives will contribute to the supply side of the housing affordability crisis.
Removing restrictions on non-concessional contributions for downsizers will improve individuals’ capacity to self-fund their retirement. Incentives for first home buyers to save for their deposit through the superannuation system will improve access and affordability.
We are concerned that the Government’s vacant property tax could negatively affect housing supply. The proposed new dwelling rules, which state all developers – whether Australian or foreign-based – cannot sell over 50% of their stock to foreign investors, will also have a detrimental effect.
The announcements restricting sales of property developments to foreign investors could mean that many projects will not proceed because the local market for apartments is not deep enough to soak up the surplus stock that cannot now be sold to foreign investors.
Further, new property development has been strongly supported by foreign bank funding, with Australian banks significantly deleveraging from property over the last 18-24 months. We question what impact the reduction on permitted foreign investment may have on foreign bank participation. Investors and financiers may also now direct their capital into non-residential property classes, such as commercial properties and hotels, further impacting on the supply side of the housing market.
We are also highly conscious of the competitive global market. Care must be taken to prevent foreign investors diverting their capital to other jurisdictions such as Canada, South Africa, New Zealand and the UK.
Australia has been defined by our openness to foreign investment, yet the government jeopardises economic growth with any efforts to shut foreign investors out of our property market. The anti-foreign investment messages we are sending could impact foreign investor sentiment and broader inbound capital investment flows.
We are also concerned over the proposed levy on the five major banks’ liabilities – which looks to us like a stealth super profits tax. This significant new fundraising levy will undoubtedly be passed onto consumers in some form.
Treasury believe they can protect the consumer, but there are numerous avenues for potential impact. This is because the major banks represent a substantial portion of the ASX, and superannuation funds and retirees in particular rely on dividends from bank shares and the capital value of those investments.
Finally, on the significant increase in the Medicare Levy, which will be borne by taxpayers across the board, we are wary that the promised quarantining of funds for the NDIS, Medicare and the PBS may not be enforced, but rather lost to consolidated revenue.