Budget 2018: Budget bottom line improves but restraint is the name of the game

To many, the 2018 federal budget will be thought of as an almost election budget. It confirmed moderate personal income taxes but otherwise kept the reins tight on what could be described as a relatively pedestrian budget.

The fact an election is almost certainly at least six months and possibly a year or more off has obviously encouraged continued restraint.

Despite a dramatic improvement in tax receipts and in the budget bottom line, the government took the opportunity to move towards budget balance.

This year, the budget deficit will come in at $18.2 billion, but it will decline to $14.5 billion in 2018—19.

It was a sensible approach given there are doubts the pace of budget improvement can be sustained, although the growth in company tax receipts is a shining light.

However, companies should continue to prosper, with wage restraint expected to continue and GDP growth of 2.75% over the next year. The GDP growth is well below the 20-year average although an improvement on recent years.

One undoubted achievement has been the moderation of the deficit with recurrent spending (not including capital expenditure) matching revenue.

At the same time, should the recent surge in economic activity continue, then the fiscal tap is likely to open further in the weeks leading up to the next election.

The reality is that the improvement in the budget bottom line has primarily been on the back of improved company tax receipts.

Since the MYEFO statement late last year the estimate for company tax receipts for the 2017—2018 year have increased by $2.5 billion and is to be even higher in 2018—2019. This compares with only an increase of $1.6 billion in tax revenue from individuals in the same period.

Given the improvement in the budget is largely as a result of company tax, it is disappointing that the government targeted the R&D tax incentive for cuts.

The reality is that startups and technology-based innovation companies have been among the most dynamic sectors of the economy.

However, it seems the opportunity to cut $2.4 billion in projected revenue losses over the next four years (the difference between the new and current scheme) was too much to resist. It is yet to be seen if the government eventually regrets a decision that could send some R&D offshore seeking more favorable treatment.