The most important budget since World War Two

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Tuesday’s federal budget will be the ‘most important since the Second World War’ – in the words of Prime Minister Scott Morrison – as the government attempts to lift Australia out of its deepest recession since the Great Depression of the 1930s.

Lockdowns and restrictions imposed to combat coronavirus have hammered the economy and seen more than one million Australians join the dole queue. 

Now the government wants to help the nation get back to work with tax cuts and deregulation among the measures to be announced by Treasurer Josh Frydenberg in a speech to parliament at 7.30pm.

Scott Morrison (pictured in his office in Canberra) has said Tuesday’s budget is the most important since World War Two

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Treasurer Josh Frydenberg (pictured with his son Blake after delivering his budget last year) will make his budget speech on Tuesday night

Treasurer Josh Frydenberg (pictured with his son Blake after delivering his budget last year) will make his budget speech on Tuesday night

The budget is normally announced in May, but the government pushed it back to better analyse the impact of the pandemic and prepare a more thorough response.

In September ministers learned that in the three months until 30 June, the economy shrank by seven per cent, the biggest contraction since quarterly records began in 1959. 

On an annual basis the economy took a 6.3 per cent hit, the worst figure since the depths of the Great Depression when it shrank by about 10 per cent, and a greater contraction than after the Second World War in 1945 when growth tumbled by 5.1 per cent as troops returned home. 

Not only is the government dealing with a fragile economy, but also a rapidly growing mountain of public debt after spending billions of dollars on coronavirus policies. 

Measures to soften the impact of restrictions such as the boosted JobSeeker allowance and the JobKeeper payment have economists predicting a budget shortfall of more than $200billion this year. 

This graph shows how the economy has been hammered by coronavirus compared with previous downturns

This graph shows how the economy has been hammered by coronavirus compared with previous downturns

This graph shows how employment nosedived due to lockdowns. But more than 700,000 jobs have come back since June as restrictions were lifted

This graph shows how employment nosedived due to lockdowns. But more than 700,000 jobs have come back since June as restrictions were lifted

Mr Frydenberg has said he will draw inspiration from former UK prime minister Margaret Thatcher and US president Ronald Reagan (pictured together in 1998 at the G7 summit in Toronto), who re-modelled their economies in their 1980s based on small government and trust in free markets

Mr Frydenberg has said he will draw inspiration from former UK prime minister Margaret Thatcher and US president Ronald Reagan (pictured together in 1998 at the G7 summit in Toronto), who re-modelled their economies in their 1980s based on small government and trust in free markets

Westpac economists put the figure at $240billion, representing 12.5 per cent of GDP. 

The prime minister and treasurer are all too aware of the challenge ahead of them.

‘This budget will be necessarily different in scale to those we have seen for generations,’ Mr Morrison said on Thursday.

‘It will respond to the challenge of our time.’

Mr Morrison said the budget has two aims. One is to ‘recover what’s been lost – the jobs, the livelihoods, the hours, the incomes, the customers, the clients’.

And the other is to ‘take new ground by rebuilding our economy for the future.’

This will involve embracing new technology and preparing 10-year plans for industries including manufacturing and energy. 

The government believes the path to recovery involves serious economic reform including reducing taxes, decreasing regulation and overturning industrial relations rules. 

Mr Frydenberg has said he will draw inspiration from former UK prime minister Margaret Thatcher and US president Ronald Reagan, who re-modelled their economies in their 1980s based on small government and trust in free markets.

On Thursday Mr Morrison said he wanted to create an economic environment that is friendly to business. 

Recessions in Australia

Up until the 1991 recession, Australia had suffered an economic contraction several times a decade, on average.

A prolonged recession that began in September 1982 lasted a year, during a period of prolonged drought and the devastating Ash Wednesday bushfires in Victoria and South Australia. That followed another recession in 1981.

Another recession also occurred in 1977, during an era of widespread strikes.

The economy also took a beating in the final two quarters of 1975, when Governor-General Sir John Kerr dismissed Gough Whitlam as Labor Prime Minister.

A recession also occurred in late 1971 and early 1972, several months before Billy McMahon lost the election, ending 23 years of Coalition rule.

A credit squeeze also sparked another recession during the June and September quarters of 1961, ending only two months before then Prime Minister Robert Menzies held on to power by one seat.

Source: Australian Bureau of Statistics national accounts GDP data 

‘You can invest all the resources you like in industry programmes, but if taxes are too high, industrial relations systems are too complicated, the adoption of digital technology is patchy, energy is too expensive, approvals take too long and are too costly, the roads are clogged, employees do not have the right skills, and you are shut out of overseas markets, you are wasting your time,’ he said.

The government has already announced a range of tax cuts for small business and is expected to bring forward personal income tax cuts which were due in 2022.

The plan would give earners on $50,000 to $80,000 a $1,080 cut while those on $40,000 would get a $580 cut.

Those earning $90,000 would get $1,215, compared with 2017-18 and those earning $120,000 or more would get a discount of $2,565. 

The budget will also include major reforms to Australia’s immigration system, including a much shorter list of professions that qualify for a skills shortage visa.

There will also be billions allocated for Australia’s manufacturing and energy industries as the government attempts to support more than one million jobs in these sectors. 

The prime minister has also hinted there will be some kind of wage subsidy scheme to encourage employers to take on new workers.

There will also be funding for skills and training including apprenticeships. 

The Labor Party wants the government to permanently increase the JobSeeker rate – but the treasurer has said he is leaning towards another temporary extension beyond January. JobKeeper will last at a reduced rate until March. 

Earlier this month the treasurer warned that no matter what’s in the budget he can’t immediately get the economy back to the way it was before coronavirus.

In a speech to the Australian Chamber of Commerce and Industry last week, Mr Frydenberg said the effects of the coronavirus-caused recession will last for many years. 

He said wages growth is likely to remain subdued for ‘at least the next few years’. 

In the April-to-June quarter, wages grew by just 0.2 per cent – the lowest increase for 22 years – and that was before Victoria’s second lockdown caused even more economic damage. 

Australia’s unemployment rate, which was five per cent before the pandemic, was 7.5 per cent in July and 6.8 per cent in August. 

‘As with past recessions, here and around the world, the unemployment rate will take time to return to pre-crisis levels, despite our unprecedented response,’ the treasurer said.

In his first budget, unveiled in April 2019 ahead of the election, Mr Frydenberg announced that those earning $120,000 or more would receive $2,565 worth of annual tax cuts from the middle of 2022. These tax cuts are expected to be brought forward

In his first budget, unveiled in April 2019 ahead of the election, Mr Frydenberg announced that those earning $120,000 or more would receive $2,565 worth of annual tax cuts from the middle of 2022. These tax cuts are expected to be brought forward

He said the other major change to the economy will be a ‘persistently lower level of prices and wages’.

‘With high levels of spare capacity in the economy, it will be some time before inflation returns to the mid-point of the Reserve Bank’s target range [of 2-3 per cent].

‘And wages growth is also likely to remain subdued for at least the next few years, until the jobs market tightens.’

In the June quarter inflation was -0.3 per cent, meaning prices dropped slightly.    

In September national accounts data confirmed a technical recession for the first time since mid-1991, following a 0.3 per cent decline in gross domestic product during the March quarter.

Before the June quarter Australia officially held a 29-year world record for avoiding a recession but Covid-19 social distancing policies and border closures ended that with a bang.

Mr Frydenberg described the results of a ‘once-in-a-century pandemic’ as ‘heart breaking’ human stories – from tourism operators to tradies – after household consumer spending fell for the first time ever.

On an annual basis, the economy shrunk by 6.3 per cent in the year up to June 30, 2020. The quarterly slump was even worse than the early stages of the 1930s Great Depression while the annual decline at a level unseen since the aftermath of World War II in 1945

On an annual basis, the economy shrunk by 6.3 per cent in the year up to June 30, 2020. The quarterly slump was even worse than the early stages of the 1930s Great Depression while the annual decline at a level unseen since the aftermath of World War II in 1945

The huge tax changes coming to small businesses in 2020 budget 

Businesses with an aggregated annual turnover between $10million and $50million will have access to up to ten small business tax concessions. The changes are estimated to support about 20,000 businesses and 1.7million employees. 

Immediate deduction for certain start-up expenses

From 1 July 2020, eligible businesses can immediately deduct a range of professional expenses and Australian government agency payments associated with starting a new business, such as professional, legal and accounting advice. Currently, these costs are usually deducted over a five year period.

Immediate deduction for certain prepaid expenditure

From 1 July 2020, eligible businesses can immediately deduct certain prepaid expenditure where the payment covers a period of 12 months or less that ends in the next income year. Currently, business expenditure that relates to multiple income years is generally not immediately deductible.

Fringe benefits tax (FBT): small business car parking exemption

From 1 April 2021, eligible businesses would be exempt from FBT on car parking benefits provided to employees if the parking is not provided in a commercial car park.

FBT: multiple work-related portable electronic devices exemption

From 1 April 2021, eligible businesses would be exempt from FBT on multiple work-related portable electronic devices provided to employees – even if the devices have substantially identical functions.

Simplified trading stock rules

From 1 July 2021, eligible businesses can choose to use a simplified trading stock regime. Under this regime, eligible businesses may choose not to conduct a stocktake (and account for changes in the value of trading stock) for an income year, if the difference between the opening value of stock on hand and a reasonable estimate of stock on hand at the end of the year does not exceed $5,000.

Pay as you go (PAYG) instalments based on GDP-adjusted notional tax

From 1 July 2021, eligible businesses would have the option to have their PAYG instalments calculated for them by the ATO (based on previously reported information).

Currently, they are required to calculate their actual income for the period, as the basis for their PAYG instalment calculation.

Small business excise concession

From 1 July 2021, eligible businesses would be able to apply to defer settlement of excise duty to a monthly reporting cycle, instead of the current weekly reporting cycle. This only applies to eligible goods under the current small business entity concession.

Small business excise-equivalent customs duty concession

From 1 July 2021, eligible businesses would be able to apply to defer settlement of excise-equivalent customs duty from a weekly to monthly reporting cycle. This only applies to eligible goods under the current small business entity concession.

Two-year amendment period

From 1 July 2021 eligible businesses (excluding entities with significant international tax dealings or particularly complex affairs) will have a two year amendment period apply to income tax assessments for income years. The current exceptions, including for fraud or evasion, would continue to apply. Businesses can lodge an amendment application before the time limit and the ATO may extend the time limit to give effect to the application. Currently, they are subject to a four-year amendment period.

Simplified accounting methods

From 1 July 2021, the Commissioner of Taxation’s power to create a simplified accounting method determination for eligible businesses for GST purposes will be expanded to apply to businesses below the $50 million aggregated annual turnover threshold.

Remove fringe benefits tax for retraining

From 2 October 2020 the government will remove the 47 per cent fringe benefits tax on retraining provided by employers to redundant, or soon to be redundant, employees. 

This will encourage employers to help workers transition to new employment opportunities within or outside their business.

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