Of the $24.5bn committed to new projects less than $5bn is projected to be spent in the next four years leaving projects susceptible to economic or political change.
Megan Motto, CEO of Consult Australia, said: "That a government can move from ‘budget emergency’ to tax cuts, and a return to surplus in less than five years, indicates variability in the economy. Of the $5bn allocated for the Melbourne Airport, for example, just $250 million is projected to be spent over the next four years, and even this is subject to the project’s approval by the Victorian Government. Consult Australia welcomes the focus on infrastructure, but we do cautiously, knowing a great deal of spend is based on future projections and externalities outside the Treasurer’s control."
Consult Australia’s media release on the 2018 Federal Budget is available here.
DEBT AND DEFICITS
As predicted by many commentators the Government aims to return to the Budget to surplus by 2019-20, growing to more than 1% of GDP in the medium to long term.
Net debt is expected to peak at 18.6% of GDP in 2017-18 and is then projected to fall in each year of the forward estimates, reaching 3.8% of GDP by 2028-29.
Budget forecasts for tax receipts have been revised up by $12billion over four years to 2021-22. This has been predominately driven by commodity prices being stronger than forecast and good employment growth. The Government intends to offset this by personal tax cuts (as opposed to using it all to pay down debt) in order to keep under its tax cap of 23.9%.
While both tax relief and debt reduction are welcome, Consult Australia (and other commentators) would like to have seen more considered spending restraint in addition to these measures.
The Government’s commitment to deliver $75 billion of infrastructure over the next decade continues with a spend of $24 billion spread across all States and Territories. The majority of these projects were announced prior to the Budget, and pleasingly the majority are priority projects as identified by Infrastructure Australia. A key factor in delivering these projects going forward will be industry capacity.
In the Budget papers the Government is keen to point out that it is using a broader range of methods to support infrastructure, seeking to take a more active role in managing its significant investments and partnering with State and Territory governments and the private sector to deliver major projects. Different support mechanisms provide different degrees of flexibility and exposure to financial and non-financial risks, these include equity, concessional loans and guarantees. The Government acknowledges the role that the Infrastructure and Project Finance Agency plays in identifying alternative financing options and the key role that Infrastructure Australia plays in identifying national infrastructure priorities, including assessing cost-benefit analysis.
Much of the infrastructure spending was announced before the Budget. These projects form part of the $75 billion infrastructure funding and financing announced in the 2017-18 budget to be delivered over the next decade. In this Budget $24.5 billion will be committed to the following projects using a combination of grant funding, loans and equity investments:
New South Wales - $1.5 billion, including:
• $971 million for the Pacific Highway Coffs Harbour Bypass;
• $400 million for the Port Botany Rail Line Duplication; and
• $155 million for the Nowra Bridge.
• In addition to funding these projects, the Commonwealth and New South Wales governments will be equal partners in funding the first stage of the North South Rail Link in Western Sydney.
In Victoria - $7.8 billion, including:
• a commitment of up to $5 billion for the Melbourne Airport Rail Link;
• $1.8 billion for the North East Link;
• $475 million for Monash Rail;
• $225 million for electrification for the Frankston Rail Line to Baxter;
• $140 million for a Victorian congestion package;
• $132 million to complete the duplication of the Princes Highway East from Traralgon to Sale; and
• $50 million for Geelong Rail Line upgrades.
In Queensland - $5.2 billion, including:
• an additional $3.3 billion for priority upgrades on the Bruce Highway;
• an additional $1 billion for the M1 Pacific Motorway;
• $390 million for the Beerburrum to Nambour Rail Upgrade;
• $300 million for the Brisbane Metro project; and
• $170 million for the Cunningham Highway – Yamanto to Ebenezer (Amberley Interchange).
In Western Australia - $2.6 billion, including:
• a further $1.1 billion for the METRONET rail project,
• $944 million for a Perth Congestion Package and
• $560 million for the Bunbury Outer Ring Road.
In South Australia - $1.8 billion, including:
• $1.4 billion for North-South Road Corridor projects, with the Regency Road to Pym Street section of the Corridor to receive $177 million.
• $220 million for the Gawler Rail Line electrification and
• $160 million for the Joy Baluch Bridge.
In Tasmania - $461 million for:
• the Bridgewater Bridge replacement; and
• an additional $59.8 million for the Tasmanian Freight Rail Revitalisation Package.
In the Australian Capital Territory:
$100 million for the Monaro Highway Upgrade.
In the Northern Territory:
• $280 million for upgrades of the Central Arnhem Road and the Buntine Highway.
The Government also reports that it has reached agreement with NSW and Victoria to take full ownership of Snowy Hydro, paving the way for the Snowy Hydro 2.0 project which will provide 2,000 megawatts of extra electricity capacity and enough storage to power 500,000 homes for a week.
Roads of Strategic Importance initiative
Under this initiative the Government will provide funding of $3.5 billion to upgrade key routes to improve access for businesses and communities to essential services, markets and employment opportunities. The Roads of Strategic Importance initiative includes $1.5 billion for a Northern Australia Package for Queensland, the Northern Territory and Western Australia, $400 million for Tasmania, $220 million for the Bindoon Bypass in Western Australia, $100 million for the Barton Highway Upgrade benefiting New South Wales and the Australian Capital Territory, and $1.3 billion for future national priorities.
The Government will provide $200 million for a third round of the Building Better Regions Fund to support regional infrastructure and community investment. This is in addition to the Regional Growth Fund, which is investing $272 million in larger regional infrastructure projects.
Urban Congestion Fund
The Government is establishing a $1 billion Urban Congestion Fund to tackle urban congestion in cities. This will support projects to remediate pinch points, improve traffic safety and increase network efficiency for commuter and freight movements in urban areas.
Major Project Business Case Fund
The Government will provide $250 million to establish a Major Project Business Case Fund to contribute to the development of business cases for future high priority land transport infrastructure investments.
This measure includes initial contributions of $10 million for a business case for the Orange Route in Western Australia and $15 million for a business case for the Toowoomba to Brisbane Passenger Rail. Provision for this funding has already been included in the forward estimates.
BUSINESS & TAXATION
Personal tax cuts
Personal tax cuts will be staged and focus initially on low and middle income earners. Low and middle-income earners will receive a tax cut by new non-refundable tax offset, in addition to the Low Income Tax Offset (LITO), which will provide tax relief of up to $530 for the 2018-22 income years. Middle income earners will receive some safeguarding from bracket creep, as the top threshold of the 32.5% tax break will be increased to $90,000 (from 1st July 2018). The top threshold of 32.5% bracket will then be further increased to $120,000 from 1 July 2022. The number of tax brackets will be decreased to four, removing the 37% bracket so those earning between $41,000 and $200,000 will be in the same bracket. The tope marginal tax rate of 45% will remain the same for those above $200,000.
Multinational Tax Integrity
The Government will amend the thin capitalisation rules, which limit the amount of debt deductions multinational entities can claim in Australia. There will be greater scrutiny of asset valuations used to justify debt deductions, and inbound investors will not be able to access tests that were only intended for outward investors. The definition of a large multinational (or Significant Global Entity) will be amended so that large multinational businesses that are ultimately owned by private entities or investment entities are not inadvertently excluded from the application of tax integrity rules such as the Diverted Profits Tax and the Multinational Anti-Avoidance Law.
The Government will also remove the ability for Managed Investment Trusts (MITs) and Attribution MITs to apply the capital gains tax discount at the trust level. Investors will still retain the ability to apply the capital gains tax discount themselves in line with the current rules.
The Government will extend the $20,000 instant asset write-off for businesses with a turn over of up to $10million to apply in 2018-19.
Corporate tax base
The Government will tighten the rules on stapled structures to prevent staples being used to convert trading income into more favourably taxed passive income, as well as tightening broader tax concessions for foreign pension funds and sovereign wealth funds. Foreign investors will no longer be able to use stapled structures and other concessions to achieve tax rates of 15% or less on Australian business income, rather than the 30% that should apply. These measures are forecast to raise $400 million over the forward estimates.
The Government continues to pursue their company tax reforms through the Parliament.
Research and Development Tax Incentive (R&DTI)
From 1 July 2018, the Government will introduce a new R&D premium for companies with turnover of $20 million or more. The intention is to support larger companies undertaking additional, high-intensity business R&D.
The Government will also impose a cap of $4 million on cash refunds and convert the rate of the R&D tax offsets to a premium above each claimant’s company tax rate.
The Government has also flagged that there will be administrative and compliance improvements that will help improve the ongoing sustainability, transparency and integrity of the R&DTI.
For companies with aggregated annual turnover of $20 million or more, the Government will introduce an R&D premium that ties the rates of the non-refundable R&D tax offset to the incremental intensity of R&D expenditure as a proportion of total expenditure for the year.
The marginal R&D premium will be the claimant’s company tax rate plus:
• 4 percentage points for R&D expenditure between 0 per cent to 2 per cent R&D intensity;
• 6.5 percentage points for R&D expenditure above 2 per cent to 5 per cent R&D intensity;
• 9 percentage points for R&D expenditure above 5 per cent to 10 per cent R&D intensity; and
• 12.5 percentage points for R&D expenditure above 10 per cent R&D intensity.
The R&D expenditure threshold—the maximum amount of R&D expenditure eligible for concessional R&D tax offsets, will be increased from $100 million to $150 million per annum.
For companies with aggregated annual turnover below $20 million, the refundable R&D offset will be a premium of 13.5 percentage points above a claimant’s company tax rate. Cash refunds from the refundable R&D tax offset will be capped at $4 million per annum. R&D tax offsets that cannot be refunded will be carried forward as non-refundable tax offsets to future income years.
The measure is estimated to have a net gain to the budget of $2.4 billion in fiscal balance terms over the forward estimates period. In underlying cash terms, the net gain to the budget is $2 billion over the forward estimates period.
SKILLS & EDUCATION
Women in Science, Technology, Engineering and Mathematics (STEM)
Building on the National Innovation and Science Agenda measures to develop talent and skills, the Government is providing $4.5 million over four years from 2018-19 to encourage more women into education and careers in STEM. This includes:
- A Women in Science Strategy, informed by a 10-year Plan for Women in Science, will provide a roadmap for sustained increases in women’s science participation
- A Women in Science Ambassador
- A resource kit will help support the engagement and encouragement of school age girls into STEM study and careers.
Achieving Excellence in Australian Schools
The Government has endorsed the recommendations of the Review to Achieve Educational Excellence in Australian Schools led by David Gonski AC and is working with the States and Territories to deliver the blueprint for reform. The Government is making sure that record levels of funding committed in the 2017-18 Budget deliver better educational outcomes for every student.
The Government is supporting rural and regional Australia by delivering on the recommendations of the Independent Review into Regional, Rural and Remote Education. The Government will provide $28.2 million to expand access to sub-bachelor (including enabling) places to allow greater access to higher education for rural and regional students. The Government will also provide $14 million to fund additional Commonwealth supported places for bachelor students studying at Regional Study Hubs.
$2.4 billion has been allocated to Australia’s public technology infrastructure for the development of supercomputers, world class satellite imagery, and more accurate GPS across Australia. This aligns with Consult Australia’s work on technology and smart cities.