The time bombs in the Federal Budget: Gottliebsen

In every Budget there are silent time bombs that no one talks about. I have picked three in the 2010-11 Budget, but I am sure there are many more.

We have an enormous need for infrastructure investment and once again the money set aside for it is totally inadequate. What’s needed is substantial private investment, but there is a problem.

The government does not understand the rates of return that are required, and the certainty that must be offered, to raise private money. It uses only 6% to justify its NBN investment and has used the same 6 per cent rate as the trigger point for the resource super profits tax. There is insufficient realistic understanding in the top echelons of Canberra of the rates of return that are required in the private sector. In addition, the retrospective taxation in minerals and the carbon morass means that sensitive groups like power investors now have much less trust in the Australian government and want locked-in rules.

The government claims that its simplified disclosure for corporate bond issuance, and the new discounts on bond income, will help infrastructure. They might, but only if the returns are set properly.

The second silent time bomb is the corporate taxation cut. The small business taxation reduction in 2012-13 will cost $300 million, the reduction in corporate tax from 30 to 29% in 2013-14 will cost $2 billion, and lowering the rate a further 28% in 2014-15 will cost a further $2 billion plus.

These large corporate tax-rate cuts are made possible by the resource super profits tax. If that has to be amended then the tax reductions will not be easy to fund.

The third time bomb concerns our banking system. There is a weakness in the Australian capital markets that the 2010-11 Budget starts to address, but still manages to leave a gap. In both the Lehman and European crises Australian bakers shivered because about half their funding comes from overseas lenders who tend to zip-up their wallets in a crisis.

Longer term, Australia needs a much bigger local bank deposit base. To help that process from July 1, 2011, the government will allow a 50% reduction in taxation on up to $1,000 worth of interest, including interest earned on deposits, bonds, debentures and annuity products. While it provides an element of fairness, capping the benefit to depositors at around the $17,000 investment level (depending on interest rates) will not solve the problem. But the solution to the problem is partly in the hands of the banks themselves, who need to learn how to price and market deposits. One only has to look at bank websites to see they are about lending rather than deposit-gathering.

It is much easier for banks to borrow offshore than attract local bank deposits.

But the treasurer has made some other moves that will help the banking market. Under the heading of “Banking Competition” the government plans to invest $16 billion in residential mortgage-backed securities to assist smaller lenders to raise competitive priced funds. This will help lenders like Members Equity, (the industry super fund-backed bank), a number of credit unions and building societies, and might even extend to groups like Bendigo Bank.

This article first appeared on Business Spectator.