The paradox of the Budget



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David Linke is the Global Head of Tax and Legal of KPMG International and was the former National Managing Partner of Deals Tax and Legal of KPMG Australia. David has over 20 years’ experience in advising financial sponsors and Australian listed companies on transactions as well as international and M&A tax.

The COVID-19 recession means we need reform now more than ever, but the Federal Budget shows it has also made this reform more difficult, writes KPMG Global Head of Tax and Legal David Linke.
 

David Linke | 16/10/2020 | 0 Comments


Three things are clear in our current times.

The first is that we have not seen an economic downturn like this for possibly 90 years: it is a crisis. The second is that the crisis enhances both the need and the desire for structural reform that will give rise to greater productivity, participation and growth. The third is that it is highly complex, politically and socially, to balance the interests of potential winners and losers from structural reform. This complexity is heightened in a period of crisis, where there are many more people who feel they are losers from the crisis itself.

Herein lies a paradox. We need and want reform more than ever as a result of the crisis, but the crisis has created an environment that makes reform more difficult. This paradox explains both the 2020 Federal Budget and the reaction to it.

This budget involved highly targeted measures that used existing or known legal mechanisms to create benefits. They created few direct losers, although some missed out on the benefits.

Many measures were temporary: tax write-offs for depreciable property, loss carry-back, employment incentives and grants for the manufacturing sector. These amount to nearly $40 billion of the nearly $100 billion of additional expenditure the Budget provided over the forward estimates.

Some brought forward benefits or abandoned detriments, such as the phase-two personal tax cuts and changes to previously announced cuts to research and development (R&D) spending. These amount to about $20 billion of measures.

Another nearly $20 billion lies in the JobKeeper extension and further economic support for those on pensions.
Of the remainder, about a third has gone to infrastructure, a significant portion of which is designed to be spent quickly and is provided to the states on a ‘use it or lose it’ basis; a third on health and aged care, including additional expenditure for hospitals and access to anticipated COVID-19 vaccines; and the rest on a mixture of items.

Every budget has what might be called “tricks” that lie beneath a dominant narrative – the clever structural features that don’t appear on the surface.

So it is with this budget, in the case of temporary full expensing and loss carry-back. These measures cost $32 billion in the four-year period of the forward estimates. But in the years that follow, they improve the budget position by about $25 billion. This is due to depreciation that won’t be claimed in future years and because many losses that would otherwise be available as a tax deduction will be used up by the carry-back. The benefit of this is twofold. Firstly, it brings the expenditure, which is designed to encourage investment, forward to a period where it is most needed. Secondly, it will not increase the level of government debt over the longer term. 

The dominant narrative in this budget is unequivocally ‘jobs’, but as noted above, the subplot is that the government-sponsored measures that will create the jobs are temporary, not structural. This focus on the temporary has caused many observers to call for a focus on the longer term - with housing, childcare and green energy commonly mentioned, but also taxation, industrial relations and education.

We do need to focus on this deeper reform agenda. Hopefully, this will be part of the next phase as the temporary measures come to an end in the next two years.

In brief, this is a budget for the times, one that is focused on jobs and relies on temporary measures to get there. The paradox of our crisis is that it would have been difficult for the Federal Government to do anything else now, even though we urgently need reform.  

That said, the time has come to start thinking about the complex issues we must face to sustain our standard of living in the future. More than ever, we need leadership from our main political institutions to help us get there. Contributions from the major “thinking” organisations such as CEDA will help us along that path.


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