2019 Federal Budget Analysis
What does the 2019 Federal Budget mean for your organisation and for the wider Australian economy? AICD Chief Economist Mark Thirlwell and Head of Policy Christian Gergis provide their analysis of major budget initiatives.
Main corporate governance issues
The Budget saw few new governance policy measures, with the most significant package being a total of $606.7m over five years to facilitate the Government’s response to the Financial Services Royal Commission. Much of this funding had already been previously announced however, including, most significantly, much greater resourcing for the financial regulators, ASIC and APRA. Specifically, the two regulators will receive:
- $404.8 million over four years from 2019-20 for the Australian Securities and Investments Commission (ASIC) to implement its new enforcement strategy and expand its capabilities and roles in accordance with the recommendations of the Royal Commission; and
- $145.0 million over four years from 2019-20 to strengthen the Australian Prudential Regulation Authority (APRA) supervisory and enforcement activities which will support its response to key areas of concern raised by the Royal Commission, including with respect to governance, culture and remuneration.
The budget announcements provide a greater breakdown of how the additional ASIC and APRA funding outlined above will be ear-marked, including:
- $146 million for ASIC to undertake an accelerated enforcement approach to support the new ‘why not litigate?’ strategy;
- $63.3 million for ASIC to enhance its onsite supervision of large financial institutions (part of the “close and continuous monitoring” supervision program);
- $34.3m to extend the Banking Executive and Accountability Regime (BEAR) to all APRA-regulated entities;
- $26.1m to introduce a new conduct-focused accountability regime (presumably a reference to Commissioner Hayne’s recommendation that the BEAR be extended to explicitly cover conduct and be co-regulated by APRA and ASIC);
- $69.9 million for ASIC to deliver on its expanded mandate as primary superannuation conduct regulator, including a focus on underperforming funds and compliance with the ‘best interests’ duty; and
- $117m for APRA’s response to key areas of concern raised by the Royal Commission, including with respect to governance, culture and remuneration.
There is also $35.5m provided to create a new criminal jurisdiction of the Federal Court, which is aimed at ensuring those who have engaged in financial sector misconduct are promptly prosecuted (again, an announcement made in the lead-up to the budget).
Other policy measures for directors to note include expanding and extending the ATO’s Tax Avoidance Taskforce on Large Corporates, Multinationals and High Wealth Individuals, with $1bn to be allocated over four years from 2019-20. This measure is estimated to have a gain to the budget of $3.6bn over the forward estimates, with the additional funding to allow the ATO, amongst other things, to increase its scrutiny of specialist tax advisers and intermediaries that promote tax avoidance schemes and strategies.
In an effort to lift standards in the public sector, $104.5m will be provided to establish a Commonwealth Integrity Commission for the four years from 2019-20. The creation of the Commission – already announced in December 2018 – will operate as an independent statutory agency tasked with the investigation of corruption by Commonwealth employees.
- Back to surplus. The budget targets an underlying cash surplus of $7.1 billion (0.4 per cent of GDP) in 2019-20, following on from an estimated deficit of just $4.2 billion (0.2 per cent of GDP) in 2018-19. Surpluses are then forecast to build across the forward estimates period.
- Gross debt as a share of GDP is forecast to decline in each year of the budget estimates, falling from 27.9 per cent of GDP in 2019-20 to 12.8 per cent of GDP by 2029-30. Net debt is expected to decline from 18 per cent of GDP in 2019-20 to zero per cent by 2029-30. The government’s net financial worth is expected to improve in parallel.
- Real GDP is forecast to grow at around its estimated potential rate of 2.75 per cent in 2019-20 and 2020-21. Unemployment is forecast to stay at five per cent and Treasury still expects to see a pickup in wage growth.
- The budget offers short-term tax relief to low- and middle-income Australians and provides additional support for small businesses.
- For small businesses the budget increases the instant asset write-off threshold and also expands access to medium-sized businesses with an annual turnover of less than $50 million. The government also plans to bring forward the reduction in the company tax rate for small businesses.
- The government has increased its planned spending on infrastructure, and now intends to deliver a total of $100 billion of investment over the next decade (including existing commitments), with a focus on ‘busting congestion’ and improving connectivity.
- The budget messages focus on the symbolism of a return to surplus after more than a decade as a powerful emblem of good economic management; the delivery of income support to stretched households to help ‘ease the cost of living’; a promised future reduction in the overall income tax profile; support for small business; and a continuing commitment to infrastructure investment.
- The Budget saw few new governance policy measures, with the most significant package being a total of $606.7m over five years to facilitate the Government’s response to the Financial Services Royal Commission. Much of this funding had already been previously announced however, including, most significantly, much greater resourcing for the financial regulators, ASIC and APRA, for tougher enforcement.
- The key short-term risk to implementation of budget outcomes is of course the looming election. In terms of economic risks, it’s worth remembering that while commodity prices and the terms of trade can giveth, they can also taketh away. Higher commodity prices have provided a useful boost to budget revenues, but the longevity of these gains is – as always – questionable. The assumption of an economy growing at around trend is also subject to downside risks given the soft start to this year and the still-challenging global environment.
A budget will always be a product of its times, and this one is no exception. Key factors have influenced the latest fiscal offering.
First and most obviously, an election is imminent, and the polls have been looking unhelpful for the incumbents.
The political message from Budget 2019 therefore seeks to combine long-running messages about the payoff from fiscal responsibility in the form of an end to (more than) ‘a decade of deficits’ and a return to surplus with a vote-attracting offer to the households that have not only contributed to at least some of that budgetary heavy lifting thanks to a steady rise in the tax-to-income ratio, but which are currently being squeezed by an uncomfortable combination of falling house prices and sluggish income growth. This is couched in terms of providing support to ‘ease the cost of living’ but in other circumstances could equally have been sold as a form of fiscal stimulus.
Second, as we flagged in our recent budget preview, the government’s coffers have once again benefitted from a series of strong outcomes for commodity prices – for iron ore and metallurgical coal in particular – and also from strong employment growth. Low inflation has helped too. Taken together, this has delivered some useful fiscal room for manoeuvre. Just as the previous budget benefitted from the nice surprise of tax revenues running comfortably ahead of Treasury projections, so has the current budget enjoyed a similar windfall.
Third, and in stark contrast to the positive nominal story about the economy, the real economy looks relatively weak, despite the budget papers’ description of an economy ‘in fundamentally good shape’. Real GDP growth for 2018 as a whole may have come in at a fairly respectable 2.8 per cent, but last year was very much a story of two halves. And while the first half saw annualised growth roaring along at close to four per cent, the second saw that plummet to less than one per cent.