#Budget17 – Politics or Genius?

Handing down its first budget since being re-elected, the Turnbull Government has used the opportunity to try and win community sentiment and secure business confidence by embarking on real and meaningful change.

Funding for infrastructure, education and measures to address housing affordability have the potential to drive economic growth at a time when the nation is grappling with a subdued global economy.

The last two Federal Budgets have been fiscally restrained in an attempt to get the bottom line back under control, but both the Senate and the broader community have demonstrated very little appetite for reigning in spending, which has left the Government with little alternative but to pursue a tax and spend strategy.

So yes, this is a political budget, but if it is successful in changing the narrative, building confidence and resulting in action, then it may just be remembered in history as a budget that marked a significant turning point for our nation.

For the past decade, populist politics has prevailed over progress in Australia and self-interest has prevailed over national interest.

Reform and innovation has been paralysed, but this budget has the potential to boost business confidence which in-turn should translate into concrete private sector investment, jobs and growth. The strong focus has been on allocating increased funding in areas that will have the biggest impact on job creation and productivity.

One of the most effective ways to drive jobs and investment will come from the $75 billion infrastructure plan.

Sydney’s second airport at Badgery’s Creek, WA’s Metronet and establishing an inland rail system from Brisbane to Melbourne will create thousands of jobs and stimulate the economy, while delivering much needed infrastructure to drive connectivity across our cities.

The Government is still promising a return to surplus by 2021 but most economists will tell you that the numbers these projections are built on are bullish to say the least. The Government is making a large bet that investing in infrastructure, lifting education outcomes and attempting to ease the housing affordability crisis, will pay dividends over the medium to longer term.

The Government has needed to raise revenue to fund these big promises and they have done this via 15 major tax and levy measures which will raise around $17 billion.

There is no doubt these changes will add complexity to a tax system which is screaming for reform and simplification and the elephant in the room continues to be consumption tax – changing the GST has become an unspeakable option but it is a reality we are going to have to face into as a nation at some point. Broadening the current GST to cover food, health and education would raise $16 billion, raising the rate to 15 per cent would raise $31 billion and doing both would raise $50 billion. If we want a world class education and health system, a generous welfare safety net and ongoing investment in essential infrastructure, we have to recognise that the Government will be writing very large cheques, and tinkering around the edges of the tax system is not going to be enough to underwrite these cheques.

The introduction of a major banks levy, albeit politically popular, should be approached with caution. Other countries, such as the UK, who have adopted a similar model, have yielded mixed results.

According to initial PwC modelling if the bank levy is passed on to individuals and businesses as higher borrowing and transaction costs, and to consumers as higher prices, the average loss in GDP will be approximately $650 million every year, with 6000 fewer jobs on average annually.

There needs to be a balance between our fiscal situation, community expectations and ensuring the foundation of the banking sector is stable, strong and providing economic confidence. Passing on the cost to consumers and businesses will only defeat the purpose of other growth driving measures in the budget, such as tax cuts to first home owners.

As a country, it is critically important that we have strong, profitable banks – this is something we should be proud of. Double taxing successful businesses, which not only employ thousands of Australian workers but also contribute to the balances of thousands of superannuation accounts, sends a dangerous message and can have many unintended consequences.

The promise of further funding for education is a positive step forward with the future prosperity of Australia very much linked to the nation’s education system. Allocating almost $19 billion and adopting the Gonski 2.0 reforms will hopefully see clever investment, improved learning quality and positive student outcomes. Australia already invests four times as much per student as Poland and yet yields a similar result in student results. So clearly this is more about how we spend the money as it is about how much. Investment must translate into improved student outcomes and the education system needs to equip the youth of today with the skills of tomorrow.

There is no doubt that this is a budget that has the potential to shift the political pendulum. My hope is that after years of frustrating lack of progress and leadership from our political parties, this is the turning point our great nation needs as we look to a prosperous future.

To read more insights from PwC on the 2017 Federal Budget, visit the PwC website.